General equilibrium pricing of nonredundant forward contracts

✍ Scribed by Abraham Lioui; Patrice Poncet

• Publisher: John Wiley and Sons
• Year: 2003
• Tongue: English
• Weight: 160 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10087

✦ Synopsis

Abstract

We derive the general equilibrium of a dynamic financial market in which the investors' opportunity set
includes nonredundant forward contracts. We show that Breeden's (1979) consumption‐based
CAPM equation for forward contracts contains an extra term relative to that for cash assets. We name this term a
strategy risk premium. It compensates investors for the (systematic) risk that stems from their very
portfolio strategies when the latter involve nonredundant forward contracts. We also show that Merton's
(1973) multibeta intertemporal CAPM must be amended for forward contracts to exhibit
adjusted risk premia for the market portfolio and all relevant state variables, as opposed to
the usual risk premia for cash assets. Our results are shown not to depend on the usual
cash‐and‐carry relationship, which, in general, does not hold. We, nevertheless, provide a
well‐known special case where it does hold, albeit not grounded on the usual no‐arbitrage
argument. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:817–840, 2003