Abstracts

We consider a new style of pricing theory which is affected by the market clearing condition with finite number of issued securities. This feature isn’t explicitly considered in the traditional finance theory which usually assumes both homogeneous agents and market completeness. Once we introduce the assumption of heterogeneous agents and finiteness of issued securities, the security price shifts from the level dominated only by market uncertainty.
We utilize a simple and convincing setting, that there are only two types of market participants with different risk aversions. We also consider the effect of the market clearing condition with finite number of issued securities. The security price is described as a result of transactions between different types of market participants. While the market clearing condition is defined such that all participants have to retain all the issued securities as a whole, we derive the first order condition of utility maximization problem for each type of market participants. This gives us the form of the security price; more precisely, the optimal payment formula for each market participant. We also show the uniqueness and existence of the security price.
By the procedure shown above, we deduce the premium due to the constraint of the finite number of issued securities; we call it `finite number premium’. We can define the rational range of finite number premium as well, where the security price meets no-arbitrage condition.
As an empirical analysis, we apply our model to the JGB and JGB futures markets. Utilizing these market data, we derive the finite number premium and did likelihood ratio test. As a result, we show the significance of the finite number premium in the market of JGB futures. It implies the validation of our model.