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arxiv: 1205.6193 · v1 · pith:EAHIC5VNnew · submitted 2012-05-28 · 🧮 math.OC · q-fin.TR

A Multi Period Equilibrium Pricing Model

classification 🧮 math.OC q-fin.TR
keywords modelequilibriumequilibriumsnon-tradedpricespricingriskrisky
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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.

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