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General equilibrium pricing of nonredundant forward contracts
Author(s) -
Lioui Abraham,
Poncet Patrice
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10087
Subject(s) - capital asset pricing model , portfolio , economics , market portfolio , risk premium , arbitrage , forward contract , cash , financial economics , econometrics , finance , futures contract
We derive the general equilibrium of a dynamic financial market in which the investors' opportunity setincludes nonredundant forward contracts. We show that Breeden's (1979) consumption‐basedCAPM equation for forward contracts contains an extra term relative to that for cash assets. We name this term astrategy risk premium. It compensates investors for the (systematic) risk that stems from their veryportfolio 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 tothe usual risk premia for cash assets. Our results are shown not to depend on the usualcash‐and‐carry relationship, which, in general, does not hold. We, nevertheless, provide awell‐known special case where it does hold, albeit not grounded on the usual no‐arbitrageargument. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:817–840, 2003