IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v18y2014i3p593-615.html
   My bibliography  Save this article

Pseudo linear pricing rule for utility indifference valuation

Author

Listed:
  • Vicky Henderson

    ()

  • Gechun Liang

    ()

Abstract

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model, and provides two linear approximations for the utility indifference price. The key tool is a probabilistic representation for the utility indifference price by the solution of a functional differential equation, which is termed pseudo linear pricing rule. We also provide an alternative derivation of the quadratic BSDE representation for the utility indifference price. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Vicky Henderson & Gechun Liang, 2014. "Pseudo linear pricing rule for utility indifference valuation," Finance and Stochastics, Springer, vol. 18(3), pages 593-615, July.
  • Handle: RePEc:spr:finsto:v:18:y:2014:i:3:p:593-615
    DOI: 10.1007/s00780-014-0235-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00780-014-0235-x
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marie-Amélie Morlais, 2009. "Quadratic BSDEs driven by a continuous martingale and applications to the utility maximization problem," Finance and Stochastics, Springer, vol. 13(1), pages 121-150, January.
    2. Becherer, Dirk, 2003. "Rational hedging and valuation of integrated risks under constant absolute risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 1-28, August.
    3. Briand, Philippe & Elie, Romuald, 2013. "A simple constructive approach to quadratic BSDEs with or without delay," Stochastic Processes and their Applications, Elsevier, vol. 123(8), pages 2921-2939.
    4. Vicky Henderson, 2002. "Valuation Of Claims On Nontraded Assets Using Utility Maximization," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 351-373.
    5. Ankirchner, Stefan & Imkeller, Peter & Popier, Alexandre, 2009. "On measure solutions of backward stochastic differential equations," Stochastic Processes and their Applications, Elsevier, vol. 119(9), pages 2744-2772, September.
    6. Marek Musiela & Thaleia Zariphopoulou, 2004. "An example of indifference prices under exponential preferences," Finance and Stochastics, Springer, vol. 8(2), pages 229-239, May.
    7. Tevzadze, Revaz, 2008. "Solvability of backward stochastic differential equations with quadratic growth," Stochastic Processes and their Applications, Elsevier, vol. 118(3), pages 503-515, March.
    8. Ying Hu & Peter Imkeller & Matthias Muller, 2005. "Utility maximization in incomplete markets," Papers math/0508448, arXiv.org.
    9. Michael Mania & Martin Schweizer, 2005. "Dynamic exponential utility indifference valuation," Papers math/0508489, arXiv.org.
    10. Tehranchi, Michael, 2004. "Explicit solutions of some utility maximization problems in incomplete markets," Stochastic Processes and their Applications, Elsevier, vol. 114(1), pages 109-125, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ying Hu & Gechun Liang & Shanjian Tang, 2017. "Exponential utility maximization and indifference valuation with unbounded payoffs," Papers 1707.00199, arXiv.org, revised Jul 2017.
    2. Monique Jeanblanc & Thibaut Mastrolia & Dylan Possamaï & Anthony Réveillac, 2015. "Utility Maximization With Random Horizon: A Bsde Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(07), pages 1-43, November.
    3. Gechun Liang & Thaleia Zariphopoulou, 2015. "Representation of homothetic forward performance processes in stochastic factor models via ergodic and infinite horizon BSDE," Papers 1511.04863, arXiv.org, revised Nov 2016.
    4. Wing Fung Chong & Ying Hu & Gechun Liang & Thaleia Zariphopoulou, 2016. "An ergodic BSDE approach to forward entropic risk measures: representation and large-maturity behavior," Papers 1607.02289, arXiv.org, revised Apr 2017.

    More about this item

    Keywords

    Utility indifference pricing; Quadratic BSDE; Functional differential equation; FBSDE; 91G40; 91G80; 60H30; G11; G13;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:18:y:2014:i:3:p:593-615. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.