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Continuous Equilibrium under Base Preferences and Attainable Initial Endowments

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  • Ulrich Horst
  • Michael Kupper
  • Andrea Macrina
  • Christoph Mainberger

Abstract

We consider a full equilibrium model in continuous time comprising a finite number of agents and tradable securities.We show that, if the agents’ endowments are spanned by the securities and if the agents have entropic utilities, an equilibrium exists and the agents’ optimal trading strategies are constant. Affine processes, and the theory of information-based asset pricing are used to model the endogenous asset price dynamics and the terminal payoff. Semi-explicit pricing formulae are obtained and applied to numerically analyze the impact of the agents’ risk aversion on the implied volatility of simultaneously-traded European-style options.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2011-082.pdf
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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2011-082.

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Length: 31 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2011-082

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Keywords: Continuous-time equilibrium; CAPM; affine processes; information-based asset pricing; implied volatility;

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References

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