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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26284
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| Title: | Market Incompleteness and Super Value Additivity: Implications for Securitization |
| Authors: | Gaur, Vishal
Seshadri, Sridhar
Subrahmanyam, Marti |
| Issue Date: | Nov-2003 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | OM-2005-07 |
| Abstract: | In an incomplete market economy, all claims cannot be priced uniquely
based on arbitrage. The prices of attainable claims (those that are
spanned by traded claims) can be determined uniquely, whereas the prices
of those that are unattainable can only be bounded. We first show that
tighter price bounds can be determined by considering all possible
portfolios of unattainable claims for which there are bid/offer prices.
We provide an algorithm to establish these bounds. We then examine how a
price-taking agent can “package” new assets in order to take
advantage of the incompleteness since the market places a premium on
claims that improve its spanning. In particular, we prove that a firm
with a new investment opportunity can maximize its value by
“stripping away” the maximal attainable portion of the cash
flow, for which prices are determined uniquely, and selling the balance
to investors at prices that preclude arbitrage. Our framework has
several applications in financial economics to problems ranging from
securitization to the valuation of real options. |
| URI: | http://hdl.handle.net/2451/26284 |
| Appears in Collections: | IOMS: Operations Management Working Papers
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