An Equilibrium Model with Restricted Stock Market Participation

Rodney L. White Center Working Paper No. 1-97

Posted: 9 Apr 1997

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Domenico Cuoco

University of Pennsylvania - Finance Department

Multiple version iconThere are 2 versions of this paper

Abstract

This paper solves the equilibrium problem in a pure-exchange, continuous-time economy in which some agents face information costs or other types of frictions effectively preventing them from investing in the stock market. Under the assumption that the restricted agents have logarithmic utilities, the existence of an equilibrium is demonstrated, and a complete characterization of equilibrium prices and consumption/investment policies is provided. The restricted agents' consumption volatility is shown to be decreased in comparison to the benchmark economy in which all agents have free access to the stock market, while the unrestricted agents' consumption volatility is increased. The impact of restricted participation on equilibrium prices is also discussed. A simple calibration shows that the model can help resolve some of the empirical asset pricing puzzles. In the special case of both classes of agents having logarithmic preferences, it is shown that restricted participation unambiguously decreases the real interest rate and increases the stock risk premium, as compared to a benchmark economy with costless access to the stock market.

JEL Classification: D51, G12

Suggested Citation

Basak, Suleyman and Cuoco, Domenico, An Equilibrium Model with Restricted Stock Market Participation. Rodney L. White Center Working Paper No. 1-97. Available at SSRN: https://ssrn.com/abstract=8264

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Domenico Cuoco

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,423
PlumX Metrics