Mean-field equilibrium price formation with exponential utility
Abstract
In this paper, using the mean-field game theory, we study a problem of equilibrium price formation among many investors with exponential utility in the presence of liabilities unspanned by the security prices. The investors are heterogeneous in their initial wealth, risk-averseness parameter, as well as stochastic liability at the terminal time. We characterize the equilibrium risk-premium process of the risky stocks in terms of the solution to a novel mean-field backward stochastic differential equation (BSDE), whose driver has quadratic growth both in the stochastic integrands and in their conditional expectations. We prove the existence of a solution to the mean-field BSDE under several conditions and show that the resultant risk-premium process actually clears the market in the large population limit.
Keywords
Cite
@article{arxiv.2304.07108,
title = {Mean-field equilibrium price formation with exponential utility},
author = {Masaaki Fujii and Masashi Sekine},
journal= {arXiv preprint arXiv:2304.07108},
year = {2025}
}
Comments
Forthcoming in Stochastics and Dynamics. 30 pages