Taylor approximation of incomplete Radner equilibrium models
Portfolio Management
2014-09-30 v2 Pricing of Securities
Abstract
In the setting of exponential investors and uncertainty governed by Brownian motions we first prove the existence of an incomplete equilibrium for a general class of models. We then introduce a tractable class of exponential-quadratic models and prove that the corresponding incomplete equilibrium is characterized by a coupled set of Riccati equations. Finally, we prove that these exponential-quadratic models can be used to approximate the incomplete models we studied in the first part.
Cite
@article{arxiv.1310.2973,
title = {Taylor approximation of incomplete Radner equilibrium models},
author = {Jin Hyuk Choi and Kasper Larsen},
journal= {arXiv preprint arXiv:1310.2973},
year = {2014}
}