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Annals of Finance

, Volume 9, Issue 4, pp 725–755 | Cite as

Continuous equilibrium in affine and information-based capital asset pricing models

  • Ulrich Horst
  • Michael Kupper
  • Andrea Macrina
  • Christoph MainbergerEmail author
Research Article
  • 254 Downloads

Abstract

We consider a class of generalized capital asset pricing models in continuous time with a finite number of agents and tradable securities. The securities may not be sufficient to span all sources of uncertainty. If the agents have exponential utility functions and the individual endowments are spanned by the securities, an equilibrium exists and the agents’ optimal trading strategies are constant. Affine processes, and the theory of information-based asset pricing are used to model the endogenous asset price dynamics and the terminal payoff. The derived semi-explicit pricing formulae are applied to numerically analyze the impact of the agents’ risk aversion on the implied volatility of simultaneously-traded European-style options.

Keywords

Continuous-time equilibrium Exponential utility CAPM Affine processes Information-based asset pricing Implied volatility 

JEL Classification

C62 C52 D53 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Ulrich Horst
    • 1
  • Michael Kupper
    • 1
  • Andrea Macrina
    • 2
  • Christoph Mainberger
    • 1
    Email author
  1. 1.Humboldt-Universität zu BerlinBerlinGermany
  2. 2.University College LondonLondonUK

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