Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-15T13:50:18.260Z Has data issue: false hasContentIssue false
  • English
  • Français

Nonmarketable Assets, Market Segmentation, and the Level of Asset Prices

Published online by Cambridge University Press:  19 October 2009

David Mayers
Get access Rights & Permissions [Opens in a new window]

Extract

In a general sense this analysis has been concerned with the extent of a market and the effect of limiting the extent on the prices of assets in that market. One example of the type of limited market extent with which we have been concerned is provided by nonmarketable assets and another is provided by market segmentation.

Unambiguous statements of the effect of nonmarketable assets and market segmentation on the level of prices require that and be oppossite in sign (unless one or both are zero). Only two cases have been identified where unambiguous statements can be made. The first, the case of constant absolute risk aversion, implies there is no effect of nonmarketable assets or market segmentation on the level of asset prices. The second case, constant relative risk aversion, where the coefficient of relative risk aversion is equal to or less than one, implies that prices are lower in the presence of these imperfections.

Arrow [1] argues that the coefficient of relative risk aversion must “hover around 1.” Thus, if constant relative risk aversion is a reasonable approximation to reality we should accept the implication of the latter case. Certainly, if a choice had to be made, the latter case would be the more palatable of the two. That is, constant relative risk aversion does imply decreasing absolute risk aversion, which appears more acceptable than the hypothesis of constant absolute risk aversion.

The constant relative risk aversion case has implications for such things as the organization and operation of markets and corporate merger decisions. For example, higher margin requirements that inhibit diversification would be expected to lower asset values. Also, as a matter of corporate policy, it would appear that, ceteris paribus, mergers that increase the extent of a market would be preferable to within-market mergers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 1 , March 1976 , pp. 1 - 12
Copyright
Copyright © School of Business Administration, University of Washington 1976

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

University of Rochester. Thanks are due to Michael C. Jensen, John B. Long, Jr., and Mark E. Rubinstein for helpful comments and discussion.

References

REFERENCES

[1] Arrow, Kenneth J. Aspects of the Theory of Risk Bearing. Helsinki: Yrjö Jahnsson Lectures (1965).Google Scholar
[2] Jensen, Michael C., and Long, John B.. “Corporate Investment under Uncertainty and Pareto Optimality in the Capital Markets.” Working Paper No. 6914, Graduate School of Management, University of Rochester (November 1969).Google Scholar
[3] Lintner, John. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, vol. 47 (February 1965), pp. 13–37.CrossRefGoogle Scholar
[4] Lintner, John. “Expectations, Mergers and Equilibrium in Purely Competitive Securities Markets.” American Economic Review, vol. 61 (May 1971), pp. 101–111.Google Scholar
[5] Loève, Michael. Probability Theory. Princeton: D. Van Nostrand Company, Inc. (1963).Google Scholar
[6] Mayers, David. “Non-marketable Assets and Capital Market Equilibrium under Uncertainty.” Studies in the Theory of Capital Markets, edited by Jensen, Michael C.. New York: Praeger Publishers, Inc. (1972), pp. 223–248.Google Scholar
[7] Mossin, Jan. “Equilibrium in a Capital Asset Market.” Econometrica, vol. 34 (October 1966), pp. 768–783.CrossRefGoogle Scholar
[8] Pratt, John W. “Risk Aversion in the Small and in the Large.” Econometrica, vol. 32 (January–April 1964), pp. 122–136.CrossRefGoogle Scholar
[9] Rubinstein, Mark E. “A Comparative Statics Analysis of Risk Premiums.” The Journal of Business, vol. 46 (October 1973), pp. 605–615.CrossRefGoogle Scholar
[10] Rubinstein, Mark E. “Corporate Financial Policy in Segmented Securities Markets.” Journal of Financial and Quantitative Analysis, vol. 8 (December 1963), pp. 749–761.CrossRefGoogle Scholar
[11] Sharpe, William F. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, vol. 19 (December 1964) pp. 425–442.Google Scholar