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Equilibrium Pricing in Incomplete Markets Under Translation Invariant Preferences

Author

Listed:
  • Patrick Cheridito

    () (Operations Research and Financial Engineering, Princeton University, Princeton, New Jersey 08544)

  • Ulrich Horst

    () (Department of Mathematics, Humboldt University Berlin, 10099 Berlin, Germany)

  • Michael Kupper

    () (Department of Mathematics and Statistics, University of Konstanz, 78464 Konstanz, Germany)

  • Traian A. Pirvu

    () (Department of Mathematics and Statistics, McMaster University, Hamilton, Ontario L8S 4K1, Canada)

Abstract

We propose a general discrete-time framework for deriving equilibrium prices of financial securities. It allows for heterogeneous agents, unspanned random endowments, and convex trading constraints. We give a dual characterization of equilibria and provide general results on their existence and uniqueness. In the special case where all agents have preferences of the same type and in equilibrium, all random endowments are replicable by trading in the financial market, we show that a one-fund theorem holds and give an explicit expression for the equilibrium pricing kernel.

Suggested Citation

  • Patrick Cheridito & Ulrich Horst & Michael Kupper & Traian A. Pirvu, 2016. "Equilibrium Pricing in Incomplete Markets Under Translation Invariant Preferences," Mathematics of Operations Research, INFORMS, vol. 41(1), pages 174-195, February.
  • Handle: RePEc:inm:ormoor:v:41:y:2016:i:1:p:174-195
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    File URL: http://dx.doi.org/10.1287/moor.2015.0721
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    Cited by:

    1. Wayne King Ming Chan, 2015. "RAROC-Based Contingent Claim Valuation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 21.
    2. repec:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-018-0356-8 is not listed on IDEAS

    More about this item

    Keywords

    competitive equilibrium; incomplete markets; translation invariant preferences; heterogenous agents; trading constraints; one-fund theorem;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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