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Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Bruno Biais, Johan Hombert, Pierre-Olivier Weill

NBER Working Paper No. 23986
Issued in November 2017
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

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.

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Document Object Identifier (DOI): 10.3386/w23986

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