Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices

Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices

  • ROBERT JARROW

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1980.tb02198.x

Abstract


Under heterogeneous expectations, the mean–variance model of capital market equilibrium is employed to determine the effect restricting short sales has on equilibrium asset prices. Two equivalent markets differing only with respect to short sale restrictions are compared. It is shown that, in general, risky asset prices can either rise or fall due to short sale constraints. However, under a homogeneity of beliefs for the covariance matrix of future prices, short sale constraints will only increase risky asset prices.

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