A representative agent model based on risk-neutral prices
Mathematical Finance
2018-01-30 v1
Abstract
In this paper, we determine a representative agent model based on risk-neutral information. The main idea is that the pricing kernel is transition independent, which is supported by the well-known capital asset pricing theory. Determining the representative agent model is closely related to the eigenpair problem of a second-order differential operator. The purpose of this paper is to find all such eigenpairs which are financially or economically meaningful. We provide a necessary and sufficient condition for the existence of such pairs, and prove that that all the possible eignepairs can be expressed as a one-parameter family. Finally, we find a representative agent model derived from the eigenpairs.
Cite
@article{arxiv.1801.09315,
title = {A representative agent model based on risk-neutral prices},
author = {Hyungbin Park},
journal= {arXiv preprint arXiv:1801.09315},
year = {2018}
}