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An Equilibrium Model with Restricted Stock Market Participation

Suleyman Basak and Domenico Cuoco
The Review of Financial Studies
Vol. 11, No. 2 (Summer, 1998), pp. 309-341
Stable URL: http://www.jstor.org/stable/2646048
Page Count: 33
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An Equilibrium Model with Restricted Stock Market Participation
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Abstract

This article solves the equilibrium problem in a pure-exchange, continuous-time economy in which some agents face information costs or other types of frictions effectively preventing them from investing in the stock market. Under the assumption that the restricted agents have logarithmic utilities, a complete characterization of equilibrium prices and consumption/investment policies is provided. A simple calibration shows that the model can help resolve some of the empirical asset pricing puzzles.

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