BFS 2002

Contributed Talk

Market equilibrium with coherent measures of risk

David Heath, Hyejin Ku

In this paper, we provide a definition of equilibrium in terms of risk measures, and present necessary and sufficient conditions for equilibrium in a market with finitely many traders (whom we call ``banks") who trade with each other in a financial market. Each bank has a preference relation on random payoffs which is monotonic, complete, transitive, convex and continuous, and show that this, together with the current position of the bank, leads to a family of valuation measures for the bank. We show that a market is in equilibrium if and only if there exist a (possibly signed) measure which, for each bank, agrees with a positive convex combination of all valuation measures used by that bank on securities traded by that bank.