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A representative agent model based on risk-neutral prices

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  • Hyungbin Park

Abstract

In this paper, we determine a representative agent model based on risk-neutral information. The main idea is that the pricing kernel is transition independent, which is supported by the well-known capital asset pricing theory. Determining the representative agent model is closely related to the eigenpair problem of a second-order differential operator. The purpose of this paper is to find all such eigenpairs which are financially or economically meaningful. We provide a necessary and sufficient condition for the existence of such pairs, and prove that that all the possible eignepairs can be expressed as a one-parameter family. Finally, we find a representative agent model derived from the eigenpairs.

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  • Hyungbin Park, 2018. "A representative agent model based on risk-neutral prices," Papers 1801.09315, arXiv.org.
    • Handle: RePEc:arx:papers:1801.09315
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    References listed on IDEAS

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    1. Hyungbin Park, 2016. "Ross recovery with recurrent and transient processes," Quantitative Finance, Taylor & Francis Journals, vol. 16(5), pages 667-676, May.
    2. Steve Ross, 2015. "The Recovery Theorem," Journal of Finance, American Finance Association, vol. 70(2), pages 615-648, April.
    3. repec:oup:rfinst:v:21:y:2017:i:4:p:1403-1444. is not listed on IDEAS
    4. Johan Walden, 2017. "Recovery with Unbounded Diffusion Processes," Review of Finance, European Finance Association, vol. 21(4), pages 1403-1444.
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