2025/01/21 by Hafid Lalioui, Lalioui, Hafid, Amine Ben Amar +3
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Economic theories and models #FOS: Economics and business #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2501.11983
openalex publication_date 2025/01/21 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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.