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A valuation algorithm for indifference prices in incomplete markets

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  • Marek Musiela

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  • Thaleia Zariphopoulou

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    Abstract

    A probabilistic iterative algorithm is constructed for indifference prices of claims in a multiperiod incomplete model. At each time step, a nonlinear pricing functional is applied that isolates and prices separately the two types of risk. It is represented solely in terms of risk aversion and the pricing measure, a martingale measure that preserves the conditional distribution of unhedged risks, given the hedgeable ones, from their historical counterparts. Copyright Springer-Verlag Berlin/Heidelberg 2004

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    File URL: http://hdl.handle.net/10.1007/s00780-003-0117-0
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 8 (2004)
    Issue (Month): 3 (08)
    Pages: 399-414

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    Handle: RePEc:spr:finsto:v:8:y:2004:i:3:p:399-414

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    Web page: http://www.springerlink.com/content/101164/

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    Related research

    Keywords: Incomplete markets; indifference prices; nonlinear pricing algorithm;

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    Cited by:
    1. Mingxin Xu, 2006. "Risk measure pricing and hedging in incomplete markets," Annals of Finance, Springer, Springer, vol. 2(1), pages 51-71, January.
    2. Ming Pu & Gang-Zhi Fan & Seow Ong, 2012. "Heterogeneous Agents and the Indifference Pricing of Property Index Linked Swaps," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 44(4), pages 543-569, May.
    3. Stadje, M.A. & Pelsser, A., 2014. "Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086)," Discussion Paper, Tilburg University, Center for Economic Research 2014-002, Tilburg University, Center for Economic Research.
    4. Chen, An & Pelsser, Antoon & Vellekoop, Michel, 2011. "Modeling non-monotone risk aversion using SAHARA utility functions," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(5), pages 2075-2092, September.
    5. Traian A. Pirvu & Huayue Zhang, 2012. "A Multi Period Equilibrium Pricing Model," Papers 1205.6193, arXiv.org.
    6. Gang-Zhi Fan & Zsuzsa Huszár & Weina Zhang, 2013. "The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(4), pages 568-595, May.
    7. M. R. Grasselli, 2005. "Nonlinearity, correlation and the valuation of employee stock options," Papers math/0511234, arXiv.org.
    8. Gang-Zhi Fan & Ming Pu & Seow Ong, 2012. "Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 45(1), pages 3-29, June.
    9. Ludkovski, Michael & Young, Virginia R., 2008. "Indifference pricing of pure endowments and life annuities under stochastic hazard and interest rates," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 14-30, February.

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