Arbitrage Pricing and the Existence of Equilibrium Under Portfolio Constraints PDF Download
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Author: Dong Chul Won
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
Market frictions create portfolios of complicated nature, constrained zero-income portfolios. They generate no income in the future contingencies but matter to risk sharing whether they are mispriced or not. The no arbitrage conditions of the literature may not be qualified for equilibrium conditions in the presence of constrained zero-income portfolios. Thus 'pricing by arbitrage' is far from completely characterizing asset pricing relations. The purpose of this paper is to provide a unified treatment of both asset pricing and equilibrium when asset markets are subject to portfolio constraints. In particular, 'projective arbitrage' is proposed to examine both asset pricing and the existence of equilibrium under portfolio constraints. To formulate the effect of constrained zero-income portfolios on asset pricing and equilibrium, we introduce the local and global laws of one price as an extension of the law of one price to the case with portfolio constraints. The global law of one price is identified as 'pricing by projective arbitrage.' Moreover, the global law of one price provides an important criterion for judging the capability of various notions of arbitrage to characterize equilibrium asset prices under portfolio constraints. The traditional approach to general equilibrium with incomplete markets breaks down in the face of market frictions simply because the law of one price fails.
Author: Dong Chul Won
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
Market frictions create portfolios of complicated nature, constrained zero-income portfolios. They generate no income in the future contingencies but matter to risk sharing whether they are mispriced or not. The no arbitrage conditions of the literature may not be qualified for equilibrium conditions in the presence of constrained zero-income portfolios. Thus 'pricing by arbitrage' is far from completely characterizing asset pricing relations. The purpose of this paper is to provide a unified treatment of both asset pricing and equilibrium when asset markets are subject to portfolio constraints. In particular, 'projective arbitrage' is proposed to examine both asset pricing and the existence of equilibrium under portfolio constraints. To formulate the effect of constrained zero-income portfolios on asset pricing and equilibrium, we introduce the local and global laws of one price as an extension of the law of one price to the case with portfolio constraints. The global law of one price is identified as 'pricing by projective arbitrage.' Moreover, the global law of one price provides an important criterion for judging the capability of various notions of arbitrage to characterize equilibrium asset prices under portfolio constraints. The traditional approach to general equilibrium with incomplete markets breaks down in the face of market frictions simply because the law of one price fails.
Author: Nam Dau
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
This paper studies the interaction of borrowing and short-sale constraints and their ultimate effects on asset pricing properties in a simultaneous presence of the constraints in a dynamic general equilibrium model with heterogeneous risk aversions and heterogeneous beliefs in the aggregate cash flow growth. The constraints negate the binding of each other, and hence they virtually never bind at once. Instead, there exist clear regions with alternative binding modes of the constraints with different constraints more likely to bind in different states of economy. The borrowing constraint is more active in bad times and the short-sale constraint is so in good times. The constraints bind intermittently--alternately at times--in transitory states of economy where their relative strength is balanced. Qualitatively matching empirically documented patterns of asset prices, I find that the constraints moderate their price effects but amplify their negative volatility effects, thereby can help curb the market volatility. However, a motive for speculation, featured by a speculative premium, arises due to any constraints, and thus can exist in any states of economy, not only in good times.
Author: Robert A. Jarrow
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
This paper derives an equilibrium asset pricing model with endogenous liquidity risk, portfolio constraints, and asset price bubbles. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Asset price bubbles are generated by the existence of portfolio constraints, e.g. short sale prohibitions and margin requirements. Under a restrictive set of assumptions, we prove a unique equilibrium price process exists for our economy. We characterize the market's state price density, which enables the derivation of the risk-return relation for the stock's expected return including both liquidity risk and asset price bubbles. This yields a generalized intertemporal and consumption CAPM for our economy. In contrast to the traditional models without liquidity risk or asset price bubbles, there are additional systematic liquidity risk and asset price bubble factors which are related to the stock return's covariation with liquidity risk and asset price bubbles.
Author: Kerry Back
Publisher: Oxford University Press
ISBN: 0199939071
Category : Business & Economics
Languages : en
Pages : 504
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Book Description
In Asset Pricing and Portfolio Choice Theory, Kerry E. Back at last offers what is at once a welcoming introduction to and a comprehensive overview of asset pricing. Useful as a textbook for graduate students in finance, with extensive exercises and a solutions manual available for professors, the book will also serve as an essential reference for scholars and professionals, as it includes detailed proofs and calculations as section appendices. Topics covered include the classical results on single-period, discrete-time, and continuous-time models, as well as various proposed explanations for the equity premium and risk-free rate puzzles and chapters on heterogeneous beliefs, asymmetric information, non-expected utility preferences, and production models. The book includes numerous exercises designed to provide practice with the concepts and to introduce additional results. Each chapter concludes with a notes and references section that supplies pathways to additional developments in the field.
Author: Benjamin Croitoru
Publisher:
ISBN:
Category :
Languages : en
Pages : 102
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Book Description
Author: Dong Chul Won
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
The risk-sharing role of redundant assets is not yet fully understood in constrained asset markets. For example, the well-known notions of arbitrage may fail to explain the viability property of asset prices when redundant assets are involved in generating a nontrivial linear structure of free portfolios in equilibrium in constrained asset markets. This paper establishes the existence of equilibrium in two-period asset markets which are subject to portfolio constraints. First, we provide a full analysis of complicated equilibrium behavior of constrained portfolios with redundant assets by adopting a new notion of arbitrage. To do this, a technique of portfolio decomposition is developed to identify the linear structure of free portfolios embedded in the aggregate set of constrained portfolios. Second, we present a new condition on the aggregate set of portfolios which is indispensable for the existence of equilibrium in constrained asset markets. The literature assumes that the individual portfolio constraint set or the individual marketed set of income transfers is closed to study the presence of optimal portfolios or viability of asset prices in a partial equilibrium framework. As illustrated later, however, this condition alone fails to be sufficient for the existence of equilibrium.
Author: Süleyman Başak
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
Author: Robert A. Jarrow
Publisher: Springer
ISBN: 3319778218
Category : Mathematics
Languages : en
Pages : 457
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Book Description
Yielding new insights into important market phenomena like asset price bubbles and trading constraints, this is the first textbook to present asset pricing theory using the martingale approach (and all of its extensions). Since the 1970s asset pricing theory has been studied, refined, and extended, and many different approaches can be used to present this material. Existing PhD–level books on this topic are aimed at either economics and business school students or mathematics students. While the first mostly ignore much of the research done in mathematical finance, the second emphasizes mathematical finance but does not focus on the topics of most relevance to economics and business school students. These topics are derivatives pricing and hedging (the Black–Scholes–Merton, the Heath–Jarrow–Morton, and the reduced-form credit risk models), multiple-factor models, characterizing systematic risk, portfolio optimization, market efficiency, and equilibrium (capital asset and consumption) pricing models. This book fills this gap, presenting the relevant topics from mathematical finance, but aimed at Economics and Business School students with strong mathematical backgrounds.
Author: Detemple, Jérôme
Publisher: Montréal : CIRANO
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
Author: Erhan Bayraktar
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
We consider the fundamental theorem of asset pricing (FTAP) and hedging prices of options under non-dominated model uncertainty and portfolio constrains in discrete time. We first show that no arbitrage holds if and only if there exists some family of probability measures such that any admissible portfolio value process is a local super-martingale under these measures. We also get the non-dominated optional decomposition with constraints. From this decomposition, we get duality of the super-hedging prices of European options, as well as the sub- and super-hedging prices of American options. Finally, we get the FTAP and duality of super-hedging prices in a market where stocks are traded dynamically and options are traded statically.
