2012/05/28 by Pirvu, Traian A., Zhang, Huayue · 1 citation
#FOS: Economics and business #FOS: Mathematics #Optimization and Control (math.OC) #Trading and Market Microstructure (q-fin.TR)
paper · doi:10.48550/arxiv.1205.6193
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.