Pierre-Olivier Weill (UCLA)
Kalai Family Workshop in Business and Economics
Mar 21 2018
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Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing
Abstract: Incentive problems make assets imperfectly pledgeable. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Asset markets are endogenously segmented. There is a basis going always in the same direction, as the price of any risky asset is lower than that of the replicating portfolio of Arrow securities. Equilibrium expected returns are concave in consumption betas, in line with empirical findings. As the dispersion of consumption betas of the risky assets increases, incentive constraints are relaxed and the basis reduced. When hit by adverse shocks, relatively risk tolerant agents sell the safest assets they hold.
Key words: General Equilibrium, Asset Pricing, Collateral Constraints, Endogenously Incomplete Markets