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On Securitization, Market Completion and Equilibrium Risk Transfer

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Author Info

  • Ulrich Horst
  • Traian A. Pirvu
  • Gonçalo Dos Reis

Abstract

We propose an equilibrium framework within which to price financial securities written on non- tradable underlyings such as temperature indices. We analyze a financial market with a finite set of agents whose preferences are described by a convex dynamic risk measure generated by the solution of a backward stochastic differential equation. The agents are exposed to financial and non-financial risk factors. They can hedge their financial risk in the stock market and trade a structured derivative whose payoff depends on both financial and external risk factors. We prove an existence and uniqueness of equilibrium result for derivative prices and characterize the equilibrium market price of risk in terms of a solution to a non-linear BSDE.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-010.

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Length: 43 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2010-010

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Keywords: Backward stochastic differential equations; dynamic risk measures; partial equilibrium; equilibrium pricing; market completion;

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