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Hugonnier, Julien; Prieto, Rodolfo - 2013

arbitrage opportunities that emerge endogenously in reaction to the portfolio imbalance generated by constrained agents. The … agents, arbitrage activity has an impact on the price level and generates both excess volatility and the leverage effect. We …

Persistent link: https://www.econbiz.de/10010257492

The Dynamics of Financially Constrained Arbitrage

Gromb, Denis; Vayanos, Dimitri - C.E.P.R. Discussion Papers - 2015

We develop a model of financially constrained arbitrage, and use it to study the dynamics of arbitrage capital … the dynamics of arbitrage activity are self-correcting: following a shock that depletes arbitrage capital, profitability … trades, although arbitrageurs cut their positions in these trades the least. When arbitrage capital is more mobile across …

Persistent link: https://www.econbiz.de/10011184076

A General Refutation of the Law of One Price as Empirical Hypothesis

Herrmann-Pillath, Carsten - In: Journal of Economics and Statistics (Jahrbuecher fuer … 221 (2001) 1, pp. 45-67

about arbitrage, the LOP underlies every core proposition in neoclassical trade theory, e.g. the factor price equalization … knowledge is non-tradable and even non-contractible, so that arbitrage is limited or impossible. Therefore, the LOP can be …

Persistent link: https://www.econbiz.de/10008633412

Discrete-time option pricing with stochastic liquidity

Leippold, Markus; Schärer, Steven - 2016

Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity that may contribute to significant bid-ask spreads. Within the framework of conic finance, we develop a stochastic liquidity model, extending the discrete-time constant...

Persistent link: https://www.econbiz.de/10011515968

Endogenous Collateral Constraints and the Leverage Cycle

Fostel, Ana; Geanakoplos, John - In: Annual Review of Economics 6 (2014) 1, pp. 771-799

We review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices and create bubbles. We show how leverage can be endogenously determined in equilibrium and how it depends on volatility. We describe the...

Persistent link: https://www.econbiz.de/10010886189

Asset Pricing with Countercyclical Household Consumption Risk

Constantinides, George M.; Ghosh, Anisha - National Bureau of Economic Research (NBER) - 2014

We present evidence that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and play a major role in driving asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences and a single state variable drives the...

Persistent link: https://www.econbiz.de/10010951334

Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data

Krueger, Dirk; Lustig, Hanno; Perri, Fabrizio - National Bureau of Economic Research (NBER) - 2007

We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption...

Persistent link: https://www.econbiz.de/10005084749

Complete and incomplete markets with short-sale constraints

Giménez, Eduardo L. - In: Economic Theory 21 (2003) 1, pp. 195-204

This paper argues that the introduction of a short-sale constraint in the Arrow-Radner framework invalidates standard definitions of complete and incomplete markets. Two threshold values with familiar properties arise in this constrained set-up. If short sales are not allowed on some security,...

Persistent link: https://www.econbiz.de/10005155336

Temporary financial equilibrium

Balasko, Yves - In: Economic Theory 21 (2003) 1, pp. 1-18

In a two-period pure exchange economy with financial assets, a temporary financial equilibrium is an equilibrium of the current spot and security markets given forecast functions of future prices and payoffs. The temporary equilibrium model can then be interpreted as an Arrow-Debreu economy...

Persistent link: https://www.econbiz.de/10005155408

Heterogeneity, Selection, and Wealth Dynamics

Blume, Lawrence; Easley, David - In: Annual Review of Economics 2 (2010) 1, pp. 425-450

The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this hypothesis holds, whereas in others it fails. It holds in complete-markets economies with a common discount factor and bounded...

Persistent link: https://www.econbiz.de/10009226020

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