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Mathematics and Financial Economics

, Volume 2, Issue 4, pp 211–252 | Cite as

On securitization, market completion and equilibrium risk transfer

  • Ulrich Horst
  • Traian A. PirvuEmail author
  • Gonçalo Dos Reis
Article

Abstract

We propose an equilibrium framework within which to price financial securities written on non-tradable underlyings such as temperature indices. We analyze a financial market with a finite set of agents whose preferences are described by a convex dynamic risk measure generated by the solution of a backward stochastic differential equation. The agents are exposed to financial and non-financial risk factors. They can hedge their financial risk in the stock market and trade a structured derivative whose payoff depends on both financial and external risk factors. We prove an existence and uniqueness of equilibrium result for derivative prices and characterize the equilibrium market price of risk in terms of a solution to a non-linear BSDE.

Keywords

Backward stochastic differential equations Dynamic risk measures Partial equilibrium Equilibrium pricing Market completion 

JEL Classification

G11 G12 G13 

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Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  • Ulrich Horst
    • 1
  • Traian A. Pirvu
    • 2
    Email author
  • Gonçalo Dos Reis
    • 3
  1. 1.Department of MathematicsHumboldt University BerlinBerlinGermany
  2. 2.Department of Mathematics and StatisticsMcMaster UniversityHamiltonCanada
  3. 3.CMAP, École PolytechniquePalaiseau CedexFrance

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