On the Spanning Property of Risk Bonds Priced by Equilibrium
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Bibliographic record
Abstract
We propose a method of pricing financial securities written on nontradable underlyings such as temperature or precipitation levels. To this end, we analyze a financial market where agents are exposed to financial and nonfinancial risk factors. The agents hedge their financial risk in the stock market and trade a risk bond issued by an insurance company. From the issuer's point of view the bond's primary purpose is to shift insurance risks related to noncatastrophic weather events to financial markets. As such, its terminal payoff and yield curve depend on an underlying climate or temperature process whose dynamics are independent of the randomness driving stock prices. We prove that if the bond's payoff function is monotone in the external risk process, it can be priced by an equilibrium approach. The equilibrium market price of climate risk and the equilibrium price process are characterized as solutions of nonlinear backward stochastic differential equations (BSDEs). Transferring the BSDEs into partial differential equations (PDEs), we represent the bond prices as smooth functions of the underlying risk factors. Our analytical results make the model amenable to a numerical analysis.
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Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.003 | 0.002 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.001 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from it