The Consequences of Short-Sale Constraints on the Stability of Financial Markets

Gevorg Hunanyan develops a model that provides a comprehensive theoretical framework to study the consequences of short-sale constraints on the stability of financial markets. This model shows that overpricing of securities is solely attributable to the subjective second moment beliefs of investors. Thus, short-sale constraints prevent a market decline only if investors have low dispersion of beliefs, which in the model is embodied in the covariance matrix. Moreover, the author analyses the consequences of short-sale constraints on the investor's portfolio selection, risk-taking behaviour as well as default probability. The author develops criteria that allow to analyse the effectiveness of short-sale constraints in reducing portfolio risk as well as default risk. Contents Portfolio Selection CAPM Equilibrium Dynamic Model Security Market Line Target Groups Researchers and students in the fields of financial engineering, mathematics, microeconomics, macroeconomics and business sciences Practitioners in the fields of banking, insurance, (political) consulting The Author Gevorg Hunanyan completed his doctoral dissertation under the supervision of Prof. Dr. Jan Wenzelburger at the Technische Universität Kaiserslautern at the Chair of Macroeconomics.-- Provided by publisher Gevorg Hunanyan develops a model that provides a comprehensive theoretical framework to study the consequences of short-sale constraints on the stability of financial markets. This model shows that overpricing of securities is solely attributable to the subjective second moment beliefs of investors. Thus, short-sale constraints prevent a market decline only if investors have low dispersion of beliefs, which in the model is embodied in the covariance matrix. Moreover, the author analyses the consequences of short-sale constraints on the investor's portfolio selection, risk-taking behaviour as well as default probability. The author develops criteria that allow to analyse the effectiveness of short-sale constraints in reducing portfolio risk as well as default risk. Contents Portfolio Selection CAPM Equilibrium Dynamic Model Security Market Line Target Groups Researchers and students in the fields of financial engineering, mathematics, microeconomics, macroeconomics and business sciences Practitioners in the fields of banking, insurance, (political) consulting The Author Gevorg Hunanyan completed his doctoral dissertation under the supervision of Prof. Dr. Jan Wenzelburger at the Technische Universität Kaiserslautern at the Chair of Macroeconomics.-- Provided by publisher Foreword 7 Acknowledgements 9 Contents 10 List of Figures and Tables 12 Abstract 13 Introduction 14 1 Portfolio Selection 21 1.1 Prerequisites 21 1.2 Separation theorem 26 1.3 Risk-taking behaviour 33 1.3.1 Restricted short-selling 36 1.3.2 Prohibited short-selling 38 1.4 Default risk 39 2 CAPM Equilibrium 45 2.1 Existence and uniqueness 47 2.2 The case with two investors 49 2.3 The case with three and more investors 54 3 Dynamic Model 57 3.1 Prerequisites 58 3.2 Asset price dynamics 64 3.3 Price volatility 70 4 Security Market Line 73 4.1 Systematic risk 74 4.2 Restricted short-selling 83 4.3 Prohibited short-selling 86 Conclusion 91 Appendix 93 A.1 Mathematical proofs 93 A.2 Minimum-variance portfolio 113 A.3 Primitive expectations 115 A.4 Slutsky decomposition 118 A.5 Elliptical distributions 119 Bibliography 123 Front Matter ....Pages i-xv Introduction (Gevorg Hunanyan)....Pages 1-7 Portfolio Selection (Gevorg Hunanyan)....Pages 9-32 CAPM Equilibrium (Gevorg Hunanyan)....Pages 33-44 Dynamic Model (Gevorg Hunanyan)....Pages 45-60 Security Market Line (Gevorg Hunanyan)....Pages 61-78 Conclusion (Gevorg Hunanyan)....Pages 79-80 Back Matter ....Pages 81-117