Excessive Holdings and Equilibrium Asset Prices

41 Pages Posted: 2 Feb 2005 Last revised: 15 May 2015

Date Written: November 1, 2004

Abstract

In this paper, I study the equilibrium implications when some investors in the economy overweight a subset of stocks within their portfolio. I find that the excess returns for the overweighted stocks are lower, all else being equal. This has strong testable implications for stock returns. In the special case of logarithmic preferences, the riskfree rate increases and the market price of risk for the overweighted stock decreases, which create extra incentive for unconstrained agents to exit the stock market and hold bonds, hence clearing the market. The changes of stocks' volatilities are ambiguous. Finally, I provide an accurate quantification for agents' welfare. I also discuss the implications of my model in the context of defined contribution pension plans where workers hold large shares of their employer.

Keywords: Equilibrium Asset Pricing, Excess Holdings, Incomplete Markets, Investment Restrictions, Portfolio Choice

JEL Classification: D51, D52, G11, G12, G23

Suggested Citation

Soumaré, Issouf, Excessive Holdings and Equilibrium Asset Prices (November 1, 2004). International Journal of Theoretical and Applied Finance, Vol. 10, No. 7, 2007. Available at SSRN: https://ssrn.com/abstract=624184 or http://dx.doi.org/10.2139/ssrn.624184

Issouf Soumaré (Contact Author)

Laval University ( email )

Faculty of Business Administration
Department of Finance, Insurance and Real Estate
Quebec, Quebec G1V 0A6
Canada
1418 656 3423 (Phone)
1418 656 2624 (Fax)

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