Dynamic Consumption-Portfolio Choice and Asset Pricing with Non-Price-Taking Agents
Center for Financial Research Working Paper No. 7-95
Posted: 26 Aug 1999
This paper develops a continuous-time pure-exchange model to study the dynamic consumption-portfolio problem of an agent who acts as a non-price-taker, and to analyze the implications of his behavior on equilibrium security price dynamics. The non-price-taker is modeled as a price leader in all markets; his price impact is then recast as an effect of consumption on the Arrow-Debreu prices, allowing the use of martingale methods in a tractable way. Besides the aggregate consumption, the endowment stream of the non- price-taker appears as an additional factor in driving equilibrium allocations and prices. Comparisons of equilibria between a price-taking and a non-price-taking economy are carried out.
JEL Classification: G12
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