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Journal of Applied Mathematics
Volume 2014, Article ID 408685, 14 pages
Research Article

A Multiperiod Equilibrium Pricing Model

1Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton, ON, Canada L8S 4K1
2Department of Finance, Nankai University, 94 Weijin Road, Tianjin 300071, China

Received 7 November 2013; Revised 15 January 2014; Accepted 16 January 2014; Published 5 March 2014

Academic Editor: Pu-yan Nie

Copyright © 2014 Minsuk Kwak et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We propose an equilibrium pricing model in a dynamic multiperiod stochastic framework with uncertain income. There are one tradable risky asset (stock/commodity), one nontradable underlying (temperature), and also a contingent claim (weather derivative) written on the tradable risky asset and the nontradable underlying in the market. The price of the contingent claim is priced in equilibrium by optimal strategies of representative agent and market clearing condition. The risk preferences are of exponential type with a stochastic coefficient of risk aversion. Both subgame perfect strategy and naive strategy are considered and the corresponding equilibrium prices are derived. From the numerical result we examine how the equilibrium prices vary in response to changes in model parameters and highlight the importance of our equilibrium pricing principle.