Working Papers

Quantitative Finance

F-series

Date:

Number:CARF-F-559

Mean-field equilibrium price formation with exponential utility

Author:Masaaki Fujii, Masashi Sekine

Abstract

In this paper, we study a problem of equilibrium price formation among many investors with exponential utility. The investors are heterogeneous in their initial wealth, risk-averseness parameter, as well as stochastic liability at the terminal time. We characterize the equilibrium risk-premium process of the risky stocks in terms of the solution to a novel mean-field backward stochastic differential equation (BSDE), whose driver has quadratic growth both in the stochastic integrands and in their conditional expectations. We prove the existence of a solution to the mean-field BSDE under several conditions and show that the resultant risk-premium process actually clears the market in the large population limit.

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