Equilibrium pricing of special bearer bonds

Abstract

Special Bearer Bonds provide immunity to investors in respect of black money invested in them. This paper derives equilibrium prices of these bonds in a continuous time framework using the mixed Wiener-Poisson process. The Capital Asset Pricing Model (CAPM) is modified to take into account the risk of tax raids for black money investors. The pricing of all other assets relative to each other is shown to be unaffected by the presence of black money. This result extends the CAPM to capital markets like India where black money is widespread. Other applications include estimating the magnitude of black money.