A Multi Period Equilibrium Pricing Model
Optimization and Control
2012-05-29 v1 Trading and Market Microstructure
Abstract
In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams. In an incomplete market, there exist two traded risky assets (e.g. stock/commodity and weather derivative) and a non-traded underlying (e.g. temperature). The risk preferences are of exponential (CARA) type with a stochastic coefficient of risk aversion. Both time consistent and time inconsistent trading strategies are considered. We obtain the equilibriums prices of a contingent claim written on the risky asset and non-traded underlying. By running numerical experiments we examine how the equilibriums prices vary in response to changes in model parameters.
Cite
@article{arxiv.1205.6193,
title = {A Multi Period Equilibrium Pricing Model},
author = {Traian A. Pirvu and Huayue Zhang},
journal= {arXiv preprint arXiv:1205.6193},
year = {2012}
}