Financial market equilibria with constraints: a framework for the valuation of non-traded risk in commodity markets

Daniel Schwarz
Carnegie-Mellon University

The securitization of commodity markets has resulted in a variety of derivative securities written on both traded and non-traded risk factors. We illustrate how such securities can be priced very naturally in the framework of a financial market equilibrium with constraints and provide conditions for the existence of an equilibrium in an economy whose parameters are driven by a general diffusion process. At the heart of the analysis lies a generalized version of the endogenous completeness problem from financial economics.


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