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On securitization, market completion and equilibrium risk transfer

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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.

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Authors and Affiliations

  1. Department of Mathematics, Humboldt University Berlin, Unter den Linden 6, 10099, Berlin, Germany

    Ulrich Horst

  2. Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton, ON, L8S 4K1, Canada

    Traian A. Pirvu

  3. CMAP, École Polytechnique, Route de Saclay, 91128, Palaiseau Cedex, France

    Gonçalo Dos Reis

Authors
  1. Ulrich Horst
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  2. Traian A. Pirvu
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  3. Gonçalo Dos Reis
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Correspondence to Traian A. Pirvu.

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Horst, U., Pirvu, T.A. & Dos Reis, G. On securitization, market completion and equilibrium risk transfer. Math Finan Econ 2, 211–252 (2010). https://doi.org/10.1007/s11579-010-0022-1

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  • DOI: https://doi.org/10.1007/s11579-010-0022-1

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