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Dynamic Asset Pricing with Interactions between Short-Sale and Borrowing Constraints
[Multiplicity in general financial equilibrium with portfolio constraints]

Author

Listed:
  • Lei Shi
  • Yajun Xiao

Abstract

This paper studies the joint effect of borrowing and short-sale constraints under heterogeneous beliefs and risk aversions. Although the constraints never simultaneously bind in equilibrium, interesting economics emerge in the anticipatory effects of potentially future binding constraints. In particular, the risk-free rate and Sharpe ratio experience endogenous jumps at a critical state, where two equilibria coexist. Moreover, a short-sale ban can lead to a lower stock price and higher volatility depending on the relative tightness between the constraints, and tightening the borrowing constraint during a short-sale ban can also make returns more volatile. (JEL G11, G12)

Suggested Citation

  • Lei Shi & Yajun Xiao, 2021. "Dynamic Asset Pricing with Interactions between Short-Sale and Borrowing Constraints [Multiplicity in general financial equilibrium with portfolio constraints]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 11(4), pages 886-923.
    • Handle: RePEc:oup:rasset:v:11:y:2021:i:4:p:886-923.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raab003
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    References listed on IDEAS

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    1. Han, Jinhui & Li, Xiaolong & Ma, Guiyuan & Kennedy, Adrian Patrick, 2023. "Strategic trading with information acquisition and long-memory stochastic liquidity," European Journal of Operational Research, Elsevier, vol. 308(1), pages 480-495.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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