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A Multi Period Equilibrium Pricing Model

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  • Traian A. Pirvu
  • Huayue Zhang

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.

Suggested Citation

  • Traian A. Pirvu & Huayue Zhang, 2012. "A Multi Period Equilibrium Pricing Model," Papers 1205.6193, arXiv.org.
    • Handle: RePEc:arx:papers:1205.6193
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    References listed on IDEAS

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    9. Cheridito, Patrick & Horst, Ulrich & Kupper, Michael & Pirvu, Traian A., 2011. "Equilibrium pricing in incomplete markets under translation invariant preferences," SFB 649 Discussion Papers 2011-083, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
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