Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/39280
Authors: 
Horst, Ulrich
Pirvu, Traian A.
Dos Reis, Gonçalo
Year of Publication: 
2010
Series/Report no.: 
SFB 649 discussion paper 2010,010
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.
Subjects: 
Backward stochastic differential equations
dynamic risk measures
partial equilibrium
equilibrium pricing
market completion
JEL: 
G12
D52
C62
C68
Document Type: 
Working Paper

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