Radner Equilibrium in Incomplete Levy Models

22 Pages Posted: 14 Jul 2015

See all articles by Kasper Larsen

Kasper Larsen

Rutgers, The State University of New Jersey

Tanawit Sae Sue

Carnegie Mellon University - Department of Mathematical Sciences

Date Written: July 13, 2015

Abstract

We construct continuous-time equilibrium models based on a finite number of exponential utility investors. The investors' income rates as well as the stock's dividend rate are governed by discontinuous Levy processes. Our main result provides the equilibrium (i.e., bond and stock price dynamics) in closed-form. As an application, we show that the equilibrium Sharpe ratio can be increased and the equilibrium interest rate can be decreased (simultaneously) when the investors' income streams cannot be traded.

Keywords: Unspanned income, heterogeneous exponential utilities, continuous-time equilibrium, risk-free rate puzzle, equity premium puzzle, Sharpe ratio, Levy processes

JEL Classification: G12, G11, D53

Suggested Citation

Larsen, Kasper and Sae Sue, Tanawit, Radner Equilibrium in Incomplete Levy Models (July 13, 2015). Available at SSRN: https://ssrn.com/abstract=2630101 or http://dx.doi.org/10.2139/ssrn.2630101

Kasper Larsen (Contact Author)

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

Tanawit Sae Sue

Carnegie Mellon University - Department of Mathematical Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
65
Abstract Views
841
rank
429,819
PlumX Metrics