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A Multi Period Equilibrium Pricing Model

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  • Traian A. Pirvu
  • Huayue Zhang
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    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.

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    File URL: http://arxiv.org/pdf/1205.6193
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1205.6193.

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    Date of creation: May 2012
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    Handle: RePEc:arx:papers:1205.6193

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    Web page: http://arxiv.org/

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    1. Lee, Yongheon & Oren, Shmuel S., 2009. "An equilibrium pricing model for weather derivatives in a multi-commodity setting," Energy Economics, Elsevier, vol. 31(5), pages 702-713, September.
    2. Gordon S. & St-Amour P., 2004. "Asset Returns and State-Dependent Risk Preferences," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 241-252, July.
    3. Marek Musiela & Thaleia Zariphopoulou, 2004. "A valuation algorithm for indifference prices in incomplete markets," Finance and Stochastics, Springer, vol. 8(3), pages 399-414, 08.
    4. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March.
    5. Pascal St-Amour & Stephen Gordon, 2000. "A Preference Regime Model of Bull and Bear Markets," American Economic Review, American Economic Association, vol. 90(4), pages 1019-1033, September.
    6. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
    7. Bizid, Abdelhamid & Jouini, Elyès, 2001. "Incomplete markets and short-sales constraints : An equilibrium approach," Economics Papers from University Paris Dauphine 123456789/5594, Paris Dauphine University.
    8. Ulrich Horst & Traian A. Pirvu & Gonçalo Dos Reis, 2010. "On Securitization, Market Completion and Equilibrium Risk Transfer," SFB 649 Discussion Papers SFB649DP2010-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. Nicholas Barberis, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," Journal of Finance, American Finance Association, vol. 56(4), pages 1247-1292, 08.
    10. M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308.
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