Nontraded Assets in Incomplete Markets: Pricing and Portfolio Choice

By Lars SvenssonIngrid Werner
1990| Working Paper No. 1113

This paper examines portfolio choice and asset pricing when some assets are nontraded, for instance when a country cannot trade claims to its output on world capital markets, when a government cannot trade claims to future tax revenues, or when an individual cannot trade claims to his future wages. The close relation between portfolio choice and implicit pricing of nontraded assets is emphasized. Explicit solutions are presented to the portfolio and pricing problem for special cases, including when income from the nontraded assets is a diffusion process, not spanned by traded assets, and affected by a state variable.