Date: Tuesday, December 11, 2012
Location: 1360 East Hall (3:00 PM to 4:00 PM)
Title: Equilibrium pricing in incomplete markets under translation invariant preferences
Abstract: We propose a general discrete-time framework for deriving equilibrium prices of financial securities. It allows for heterogeneous agents, unspanned random endowments and convex trading constraints. We give a dual characterization of equilibria and provide general results on their existence and uniqueness. In the special case where all agents have preferences of the same type, and in equilibrium, all random endowments are replicable by trading in the financial market, we show that a one-fund theorem holds and give an explicit expression for the equilibrium pricing kernel. If the underlying noise is generated by nitely many Bernoulli random walks, the equilibrium dynamics can be described by a system of coupled backward stochastic di fference equations, which in the continuous-time limit becomes a multidimensional backward stochastic di fferential equation. If the market is complete in equilibrium, the system of equations decouples, but if not, one needs to keep track of the prices and continuation values of all agents to solve it. Joint work with Ulrich Horst, Michael Kupper and Traian Pirvu.
Paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1755610
1452_EQP2012UM.pdf
Speaker: Patrick Cheridito
Institution: Princeton University
Event Organizer: Erhan Bayraktar erhan@umich.edu
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