Optimal multi-period consumption and investment with short-sale constraints

•We examine agents' consumption-investment problem under short-sale constraints.•Agents hold short-lived options written on aggregate consumption at each period.•The pricing implications of short-sale constraints are examined.•We derive a multi-factor consumption-based CAPM with option returns as factors.

This article examines agents' consumption-investment problem in a multi-period pure exchange economy where agents are constrained with the short-sale of state-dependent risky contingent claims. In equilibrum, agents hold options written on aggregate consumption in their optimal portfolios. Furthermore, under the specific case of quadratic utility, the optimal risk-sharing rule derived for the pricing agent leads to a multifactor conditional consumption-based capital asset pricing model (CCAPM), where excess option returns appear as factors.