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Radner equilibrium in incomplete Levy models

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journal contribution
posted on 14.07.2015, 00:00 by Kasper LarsenKasper Larsen, Tanawit Sae Sue

We construct continuous-time equilibrium models based on a fi- nite number of exponential utility investors. The investors’ income rates as well as the stock’s dividend rate are governed by discontinuous L´evy processes. Our main result provides the equilibrium (i.e., bond and stock price dynamics) in closed-form. As an application, we show that the equilibrium Sharpe ratio can be increased and the equilibrium interest rate can be decreased (simultaneously) when the investors’ income streams cannot be traded.




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