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arXiv · 1801.09315

A representative agent model based on risk-neutral prices

Hyungbin Park
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Abstract

In this paper, we determine a representative agent model based on risk-neutral information. The main idea is that the pricing kernel is transition independent, which is supported by the well-known capital asset pricing theory. Determining the representative agent model is closely related to the eigenpair problem of a second-order differential operator. The purpose of this paper is to find all such eigenpairs which are financially or economically meaningful. We provide a necessary and sufficient condition for the existence of such pairs, and prove that that all the possible eignepairs can be expressed as a one-parameter family. Finally, we find a representative agent model derived from the eigenpairs.

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Hyungbin Park. 2018-01-28. A representative agent model based on risk-neutral prices. https://arxiv.org/abs/1801.09315

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