A Multi Period Equilibrium Pricing Model

TL;DR

This paper develops a dynamic multi-period equilibrium pricing model in incomplete markets with stochastic income, analyzing how prices of contingent claims are affected by various parameters and risk preferences.

Contribution

It introduces a novel multi-period stochastic equilibrium pricing framework considering both traded and non-traded assets with stochastic risk aversion.

Findings

Equilibrium prices are sensitive to model parameters.

Risk preferences significantly influence pricing outcomes.

Numerical results illustrate the impact of market incompleteness.

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.