Asset Pricing Model in Markets of Imperfect Information and Subjective Views

We provide closed-form market equilibrium formula consolidating informational imperfections and investors beliefs. Based on Merton's model, we characterize the equilibrium expected excess returns vector with incomplete information. We then derive the corresponding market portfolio as the solution to a non-linear system of equations and analyze the sensitivities of extra excess returns to shadow-costs and market weights. We derive the market reference model for excess returns under random shadow-costs. The conditional posterior distribution of excess returns integrates the pick-matrix and pick-vector of views and the vector of shadow-costs into a multivariate distribution with mean and covariance dependent on the reference model.