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dc.contributor.authorCheridito, Patricken_US
dc.contributor.authorHorst, Ulrichen_US
dc.contributor.authorKupper, Michaelen_US
dc.contributor.authorPirvu, Traian A.en_US
dc.description.abstractWe provide results on the existence and uniqueness of equilibrium in dynamically incomplete financial markets in discrete time. Our framework allows for heterogeneous agents, unspanned random endowments and convex trading constraints. In the special case where all agents have preferences of the same type and 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 finitely many Bernoulli random walks, the equilibrium dynamics can be described by a system of coupled backward stochastic difference equations, which in the continuous-time limit becomes a multi-dimensional backward stochastic differential 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. As an example we simulate option prices in the presence of stochastic volatility, demand pressure and short-selling constraints.en_US
dc.publisherSFB 649, Economic Risk Berlinen_US
dc.relation.ispartofseriesSFB 649 discussion paper 2011-083en_US
dc.subject.keywordcompetitive equilibriumen_US
dc.subject.keywordincomplete marketsen_US
dc.subject.keywordheterogenous agentsen_US
dc.subject.keywordtrading constraintsen_US
dc.subject.keywordbackward stochastic difference equationsen_US
dc.subject.stwUnvollkommener Markten_US
dc.subject.stwStochastischer Prozessen_US
dc.titleEquilibrium pricing in incomplete markets under translation invariant preferencesen_US
dc.typeWorking Paperen_US
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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