Working Paper: CEPR ID: DP14257
Authors: Bruno Biais; Johan Hombert; Pierre-Olivier Weill
Abstract: Incentive problems make securities' payoffs imperfectly pledgeable, limiting agents' ability to issueliabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a dynamicexchange economy. Because markets are endogenously incomplete, agents have different intertemporalmarginal rates of substitution, so that they value assets differently. Consequently, agents hold differentportfolios. This leads to endogenous markets segmentation, which we characterize with Optimal Trans-port methods. Moreover, there is a basis going always in the same direction: the price of a securityis lower than that of replicating portfolios of long positions. Finally, equilibrium expected returns areconcave in factor loadings.
Keywords: General Equilibrium; Asset Pricing; Collateral Constraints; Endogenously Incomplete Markets; Incentive Compatibility; Imperfect Pledgeability
JEL Codes: D53; G10; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incentive constraints (D10) | imperfect pledgeability of securities (G32) |
| incentive constraints (D10) | ability to issue liabilities (G32) |
| incentive constraints (D10) | endogenous market segmentation (R20) |
| incentive constraints (D10) | asset pricing (G19) |
| different portfolios (G11) | endogenous market segmentation (R20) |
| equilibrium expected returns (D50) | factor loadings (C38) |