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.
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