On Securitization, Market Completion and Equilibrium Risk Transfer

We propose an equilibrium framework within two 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 to 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 risk bond whose payoff depends on both financial and external risk factors. We prove an existence and uniqueness of equilibrium result for bond prices and characterize the equilibrium market price of risk in terms of a solution to a non-linear BSDE.