Exotic Collections Asset Pricing: The Lagrangian Optimization

Abstract

Exotic collections include all non-traditional financial assets that investors pursue for investments and psychological satisfaction purposes. This paper proposes a dynamic Lagrangian model to price these assets, which carry special features compared to traditional assets. The model assumes two types of agents: one has a fixed ratio of traditional investment and the other faces the tradeoff between traditional and exotic investment. The model also incorporates risks of various assets in the utility function to best mimic the real world investor decision. This paper develops the dynamic model and derives the conditions that maximize the agent’s utility in infinite lives. This paper also solves the optimization conditions to present a solution to investment decision.