Equilibrium Pricing Under Relative Performance Concerns
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Publication:5280244
DOI10.1137/16M1082536zbMATH Open1367.91200arXiv1511.04218OpenAlexW2949258620MaRDI QIDQ5280244FDOQ5280244
Authors: Jana Bielagk, Arnaud Lionnet, Gonçalo dos Reis 
Publication date: 20 July 2017
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: We investigate the effects of the social interactions of a finite set of agents on an equilibrium pricing mechanism. A derivative written on non-tradable underlyings is introduced to the market and priced in an equilibrium framework by agents who assess risk using convex dynamic risk measures expressed by Backward Stochastic Differential Equations (BSDE). Each agent is not only exposed to financial and non-financial risk factors, but she also faces performance concerns with respect to the other agents. Within our proposed model we prove the existence and uniqueness of an equilibrium whose analysis involves systems of fully coupled multi-dimensional quadratic BSDEs. We extend the theory of the representative agent by showing that a non-standard aggregation of risk measures is possible via weighted-dilated infimal convolution. We analyze the impact of the problem's parameters on the pricing mechanism, in particular how the agents' performance concern rates affect prices and risk perceptions. In extreme situations, we find that the concern rates destroy the equilibrium while the risk measures themselves remain stable.
Full work available at URL: https://arxiv.org/abs/1511.04218
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social interactionsequilibrium pricingfinancial innovationrepresentative agententropic risk\(g\)-conditional risk measuremultidimensional quadratic BSDEperformance concerns
Stochastic calculus of variations and the Malliavin calculus (60H07) Statistical methods; risk measures (91G70) Noncooperative games (91A10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Numerical solutions to stochastic differential and integral equations (65C30) Stochastic integral equations (60H20)
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