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A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

  • Vicky Henderson
  • Gechun Liang

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model subject to inter-temporal default risk, and provides a semigroup approximation for the utility indifference price. The key tool is the splitting method. We apply our methodology to study the counterparty risk of derivatives in incomplete markets.

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File URL: http://arxiv.org/pdf/1111.3856
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Paper provided by arXiv.org in its series Papers with number 1111.3856.

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Date of creation: Nov 2011
Date of revision: May 2014
Handle: RePEc:arx:papers:1111.3856
Contact details of provider: Web page: http://arxiv.org/

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  1. Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
  2. A. Oberman & T. Zariphopoulou, 2003. "Pricing early exercise contracts in incomplete markets," Computational Management Science, Springer, vol. 1(1), pages 75-107, December.
  3. G. Liang & T. Lyons & Z. Qian, 2010. "A Functional Approach to FBSDEs and Its Application in Optimal Portfolios," Papers 1011.4499, arXiv.org.
  4. Kramkov, D. & Sîrbu, M., 2007. "Asymptotic analysis of utility-based hedging strategies for small number of contingent claims," Stochastic Processes and their Applications, Elsevier, vol. 117(11), pages 1606-1620, November.
  5. Ronnie Sircar & Thaleia Zariphopoulou, 2010. "Utility valuation of multi-name credit derivatives and application to CDOs," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 195-208.
  6. Vicky Henderson, 2002. "Valuation Of Claims On Nontraded Assets Using Utility Maximization," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 351-373.
  7. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Michael Monoyios, 2004. "Performance of utility-based strategies for hedging basis risk," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 245-255.
  9. Klein, Peter, 1996. "Pricing Black-Scholes options with correlated credit risk," Journal of Banking & Finance, Elsevier, vol. 20(7), pages 1211-1229, August.
  10. Ying Hu & Peter Imkeller & Matthias Muller, 2005. "Utility maximization in incomplete markets," Papers math/0508448, arXiv.org.
  11. Klein, Peter & Inglis, Michael, 2001. "Pricing vulnerable European options when the option's payoff can increase the risk of financial distress," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 993-1012, May.
  12. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
  13. Grasselli, Matheus & Henderson, Vicky, 2009. "Risk aversion and block exercise of executive stock options," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 109-127, January.
  14. Damiano Brigo & Kyriakos Chourdakis, 2009. "Counterparty Risk For Credit Default Swaps: Impact Of Spread Volatility And Default Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1007-1026.
  15. Vicky Henderson, 2005. "The impact of the market portfolio on the valuation, incentives and optimality of executive stock options," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 35-47.
  16. Johnson, Herb & Stulz, Rene, 1987. " The Pricing of Options with Default Risk," Journal of Finance, American Finance Association, vol. 42(2), pages 267-80, June.
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