Center for Economic Research, Department of Economics, University of Minnesota
There are three ways of measuring the value of a payoff stream in sequential markets
with portfolio constraints: the market price, the replication price, and the fundamental
value. In this paper we characterize constraints for which these measures coincide in the
absence of arbitrage, and in equilibrium. We show that the replication price functional
is linear in finite horizon markets, but only sub-linear in general in infinite horizon
unless markets are complete. We provide constraints for which the linearity holds
regardless whether markets are complete or incomplete. Applying a duality technique,
we determine an optimal replicating strategy through solving a sequence of independent
linear programs. These results do not depend on investors' preferences (other than
monotonicity), probability beliefs, endowments of goods, or supply of assets.
Huang, K.X., (1998), "Valuation and Asset Pricing in Infinite Horizon Sequential Markets with Portfolio Constraints", Discussion Paper No. 302, Center for Economic Research, Department of Economics, University of Minnesota.
Huang, Kevin Xiaodong.
Valuation and Asset Pricing in Infinite Horizon Sequential Markets with Portfolio Constraints.
Center for Economic Research, Department of Economics, University of Minnesota.
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