NONTRADED ASSETS IN INCOMPLETE MARKETS - PRICING AND PORTFOLIO CHOICE

This paper examines portfolio choice and asset pricing when some asset s are nontraded, for instance when a country cannot trade claims to it s output on world capital markets, when a government cannot trade clai ms to future tax revenues, or when an individual cannot trade claims t o his future wages. The close relation between portfolio choice and im plicit pricing of nontraded assets is emphasized. Explicit solutions a re presented to the portfolio and pricing problem for two cases with n egative exponential preferences, including when income from the nontra ded assets is a diffusion process, not spanned by traded assets, and a ffected by a state variable.