Two essays in equilibrium asset pricing with imperfections
This dissertation consists of two essays. The essay "Equilibrium Mispricing in a Capital Market with Portfolio Constraints" develops a general equilibrium, continuous time model where portfolio constraints generate mispricing between redundant securities. Constrained consumption-portfolio optimization techniques are adapted to incorporate redundant, possibly mispriced, securities. Under logarithmic preferences, we provide explicit conditions for mispricing and closed-form expressions for all economic quantities. Existence of an equilibrium where mispricing occurs with positive probability is verified in a specific case. In a more general setting, we demonstrate the necessity of mispricing for equilibrium when agents are heterogeneous enough. The construction of a representative agent with stochastic weights allows us to characterize prices and allocations, given mispricing occurs. The essay "Nonlinear Taxation, Tax Arbitrage and Equilibrium Asset Prices" investigates the equilibrium implications of the presence of nonlinearly taxed, redundant securities, and of the resulting tax arbitrage opportunities. Heterogeneity in taxation leads to discrepancies in assets' pre-tax market prices of risk. We show that this mispricing is set so that agents effectively cooperate to minimize aggregate taxes, even though individually each agent may not minimize his own tax bill. Unlike the bulk of the existing tax arbitrage literature, but consistent with empirical evidence, equilibrium in our model allows discrepancy between agents' marginal tax rates. Equilibrium with a zero net supply derivative reveals financial innovation to alleviate taxation, in particular when the derivative is taxed linearly or is taxed less heterogeneously across agents than is the stock itself. In the presence of two redundant, positive supply securities, clientele effects arise, where one agent holds the aggregate supply of each risky security, and only the bond is traded across agents. Clientele effects are shown to arise when agents' tax rates are highly heterogeneous and when the aggregate wealth is divided fairly evenly across agents.
|Year of publication:||
|Authors:||Croitoru, Benjamin Maurice|
|Type of publication:||Other|
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