Working Paper: NBER ID: w2774
Authors: Lars E.O. Svensson
Abstract: This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cannot trade claims to future tax revenues, or when an individual cannot trade claims to his future wages. The close relation between portfolio choice with and implicit pricing of nontraded assets is emphasized. A variant of Cox, Ingersoll and Ross's Fundamental Valuation Equation is derived and used to interpret the optimal portfolio. Explicit solutions are presented to the portfolio and pricing problem for some special cases, including when income from the nontraded assets is a diffusion process, not spanned by traded assets, and affected by a state variable.
Keywords: portfolio choice; asset pricing; nontraded assets; financial markets; investment decisions
JEL Codes: G11; G12; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nontraded income (H24) | portfolio choice (G11) |
| nontraded income (H24) | optimization of asset allocation (G11) |
| nontraded income (H24) | investment decisions (G11) |
| nontraded assets (G19) | optimal portfolio (G11) |
| portfolio choice (G11) | expected returns (G17) |
| portfolio choice (G11) | portfolio risk (G11) |