A financial CCAPM and economic inequalities

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Abstract

This paper considers a wealth heterogeneous multi-agent (MA) financial pricing CCAPM model. It is based on the following observations: (a) A distinction between what agents are willing to pay for consumption and what they actually pay. The former is a function of a number of factors including the agent’s wealth and risk preferences and the latter is a function of all other agents’ aggregate consumption or equivalently, their wealth committed to consumption. (b) Unlike traditional pricing models that define a representative agent underlying the pricing model, this paper assumes that each agent is in fact ‘Cournot-gaming’ a market defined by all other agents. This results in a decomposition of an n-agents game into n games of two agents, one a specific agent and the other a synthetic agent (a proxy for all other agents), on the basis of which an equilibrium consumption price solution is defined. The paper’s essential results are twofold. First, a Martingale pricing model is defined for each individual agent expressing the consumer willingness to pay (his utility price) and the market price—the price that all agents pay for consumption. In this sense, price is unique defined by each agent’s ‘Cournot game’ Agents’ consumption are then adjusted accordingly to meet the market price. Second, the pricing model defined is shown to account for agents wealth distribution pointing out that all agents valuations are a function of their and others’ wealth, the information they have about each other and other factors which are discussed in the text. When an agent has no wealth or cannot affect the market price of consumption, then this pricing model is reduced to the standard CCAPM model while any agent with an appreciable wealth compared to other agents, is shown to value returns (and thus future consumption) less than wealth-poor agents. As a result, this paper will argue that even in a financial market with an infinite number of agents, if there are some agents that are large enough to affect the market price by their decisions, such agents have an arbitrage advantage over the poorer agents. The financial CCAPM MA pricing model has a number of implications, some of which are considered in this paper. Finally, some simple examples are considered to highlight the applicability of this paper to specific financial issues.

Original languageEnglish (US)
Pages (from-to)521-534
Number of pages14
JournalQuantitative Finance
Volume15
Issue number3
DOIs
StatePublished - Mar 4 2015

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Keywords

  • Anomalies in prices
  • Applications to credit risk
  • Applications to default risk
  • Applied finance
  • Applied mathematical finance
  • Asset pricing
  • Capital asset pricing
  • Consumption

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance(all)

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