On Securitization, Market Completion and Equilibrium Risk Transfer

  • Date: 11/01/2007

Traian Pirvu (University of British Columbia)


University of British Columbia


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.

Other Information: 

MITACS Math Finance Seminar 2007