EQUILIBRIUM ASSET PRICES AND NO-ARBITRAGE WITH PORTFOLIO CONSTRAINTS

We examine intertemporal asset pricing when short sales are constraine d in proportion to the value of an investor's portfolio. All assets' p rices exceed every investor's marginal utility of consumption-based va luation of the associated dividends if every investor finds himself co nstrained in some asset in some state; we exhibit such an equilibrium. An asset's price decomposes into three (investor-specific) components : the consumption value of its dividends, a speculative value premium, and a collateral value premium The validity of the no-arbitrage prici ng approach is shown to depend critically, on the difference between r eal securities and their synthetic counterparts.