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

See all articles by Minsuk Kwak

Minsuk Kwak

Department of Mathematics, Hankuk University of Foreign Studies

Traian A. Pirvu

McMaster University

Huayue Zhang

Nankai University - School of Economics

Date Written: November 7, 2013

Abstract

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

Kwak, Minsuk and Pirvu, Traian Adrian and Zhang, Huayue, A Multi Period Equilibrium Pricing Model (November 7, 2013). 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, Available at SSRN: https://ssrn.com/abstract=2351311 or http://dx.doi.org/10.2139/ssrn.2351311

Minsuk Kwak (Contact Author)

Department of Mathematics, Hankuk University of Foreign Studies ( email )

81 Oedae-ro
Yongin, 449-791
Korea, Republic of (South Korea)

Traian Adrian Pirvu

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://ms.mcmaster.ca/~tpirvu/

Huayue Zhang

Nankai University - School of Economics ( email )

Wenjin Road
Tianjin, TianJin 300071
China

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