A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk
AbstractThis paper considers exponential utility indifference pricing for a multidimensional non-traded assets model and provides two approximations for the utility indifference price: a linear approximation by Picard iteration and a semigroup approximation by splitting techniques. The key tool is the probabilistic representation for the utility indifference price by the solution of fully coupled linear forward-backward stochastic differential equations. We apply our methodology to study the counterparty risk of derivatives in incomplete markets.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1111.3856.
Date of creation: Nov 2011
Date of revision: Feb 2012
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