A Multi Period Equilibrium Pricing Model
Minsuk Kwak, Traian A. Pirvu, and Huayue Zhang, “A Multiperiod Equilibrium Pricing Model,” Journal of Applied Mathematics, vol. 2014, Article ID 408685, 14 pages, 2014. doi:10.1155/2014/408685
Posted: 8 Nov 2013 Last revised: 29 Apr 2014
Date Written: November 7, 2013
In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income. There are one tradable risky asset (stock/commodity), one non-tradable underlying (temperature), and also a contingent claim (weather derivative) written on the tradable risky asset and the non-tradable underlying in the market. The price of the contingent claim is priced in equilibrium by optimal strategies of representative agent and market clearing condition. The risk preferences are of exponential (CARA) type with a stochastic coefficient of risk aversion. Both Nash subgame perfect strategies and naive strategies are considered. From the numerical result we examine how the equilibrium prices vary in response to changes in model parameters and highlight the importance of Nash equilibrium pricing principle.
Keywords: Nash subgame perfect, time consistency, incomplete market, equilibrium price
JEL Classification: G12, G13
Suggested Citation: Suggested Citation