Rational asset pricing bubbles and portfolio constraints

Hugonnier, Julien

doi:10.1016/j.jet.2012.05.003

Cited by 75 publications

(24 citation statements)

References 52 publications

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“…This theorem characterizes a CEF's discount as being the difference between the asset price bubbles in the CEF's shares and the NAV less the present value of the cumulative costs of running the CEF. It is important to note that asset price bubbles can exist in a rational asset pricing model equilibrium with trading constraints (see Hugonnier, ). Because equilibrium precludes constrained FLVR, we see that CEF discounts/premiums do not imply the existence of a constrained FLVR.…”

Section: Resultsmentioning

confidence: 99%

A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory

Jarrow

Protter

2019

Mathematical Finance

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This paper provides a new explanation for closed‐end fund (CEF) discounts and premiums using the local martingale theory of asset price bubbles. This is a rational asset pricing model that is shown to be consistent with the existing empirical evidence on CEF discounts/premiums. Additional testable implications of the model are derived, which await subsequent research for their resolution. This bubble theory also applies equally well to understanding discounts and premiums on exchange traded funds.

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Section: Resultsmentioning

confidence: 99%

A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory

Jarrow

Protter

2019

Mathematical Finance

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“…Under certain conditions, equilibrium prices in economies with portfolio constraints may even contain rational bubbles (Hugonnier ()). In the case

α = 1

, Prieto () shows that the stock price is free of bubbles if more risk‐averse investors are always unconstrained and less risk‐averse investors are unconstrained in some states of the economy.…”

mentioning

confidence: 99%

Asset Pricing with Dynamic Margin Constraints

Rytchkov¹

2014

The Journal of Finance

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This paper provides a novel theoretical analysis of how endogenous time‐varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk‐free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross‐sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.

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“…In general, deviations of prices from fundamental values are interpreted in the literature as evidence of the existence of bubbles. See [12], [22] or [29] for examples of models dealing with bubbles in continuous time. In so doing, however, inefficiency phenomena and the potential contribution of asset bubbles to an efficient pricing are mixed together.…”

Section: Coherent Bubblesmentioning

confidence: 99%

Asset pricing in an imperfect world

Cassese

2016

Econ Theory

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In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no arbitrage property. We show that prices are coherent if and only if the set of pricing measures is non empty, i.e. if pricing by expectation is possible.We then obtain a decomposition of coherent prices highlighting the role of bubbles. Eventually we show that under very weak conditions the coherent pricing of options allows for a very clear representation which allows, as in Breeden and Litzenberger [7], to extract the implied probability.principle of modern financial theory, i.e. risk neutral pricing. Although many an author inclines to believe that this basic principle rests on the simple tenet asserting that markets populated by rational economic agents cannot admit arbitrage opportunities, the proof of this claim, the fundamental theorem of asset pricing, has long been a challenge for mathematical economists, from Kreps [26] to Delbaen and Schachermayer [14]. In fact it requires a much more stringent condition than absence of arbitrage in which probability is needed to induce an appropriate topology.

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Rational asset pricing bubbles and portfolio constraints

Cited by 75 publications

References 52 publications

A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory

A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory

Asset Pricing with Dynamic Margin Constraints

Asset pricing in an imperfect world

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