Mean field equilibrium asset pricing model with habit formation (Forthcoming in Asia-Pacific Financial Markets)

Masaaki Fujii and Masashi Sekine
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Masaaki Fujii: Quantitative Finance Course, Graduate School of Economics, The University of Tokyo
Masashi Sekine: Ph.D. Student at Quantitative Finance Course, Graduate School of Economics, The University of Tokyo

No CARF-F-587, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper presents an asset pricing model in an incomplete market involving a large number of heterogeneous agents, based on the mean field game theory. The primary objective of this study is to derive the equilibrium risk premium process endogenously by considering the optimal consumption-investment problem and the market clearing condition. In the model, we incorporate habit formation in consumption preferences, which has been widely used to explain various phenomena in financial economics. In order to characterize the market-clearing equilibrium, we derive a quadratic-growth mean field backward stochastic differential equation (BSDE) and study its well-posedness and asymptotic behavior in the large population limit. Additionally, we introduce an exponential quadratic Gaussian reformulation of the asset pricing model, in which the solution is obtained in a semi-analytic form.

Pages: 35
Date: 2024-06, Revised 2024-11
New Economics Papers: this item is included in nep-gth
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