Equilibria in the CAPM with non-tradeable endowments

Abstract

This paper establishes existence and uniqueness of equilibria in the capital asset pricing model (CAPM) in a setting with incomplete markets in which part of the endowments are non-tradeable. It is shown that in equilibrium, agents are willing to assume aggregate hedgeable risk of the market but will no longer hold fractions of the market portfolio. The paper studies the effects of non-traded endowments on equilibrium asset prices and allocations and establishes a linear pricing formula, a security market line, and conditions for the positivity of asset prices.