Continuous Equilibrium in Affine and Information-Based Capital Asset Pricing Models

Ulrich Horst, Michael Kupper, Andrea Macrina and Christoph Mainberger

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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.

Date: 2012-01, Revised 2012-10
New Economics Papers: this item is included in nep-mst
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Journal Article: Continuous equilibrium in affine and information-based capital asset pricing models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1201.1840

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