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Certainty Equivalent and Utility Indifference Pricing for Incomplete Preferences via Convex Vector Optimization

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  • Birgit Rudloff
  • Firdevs Ulus

Abstract

For incomplete preference relations that are represented by multiple priors and/or multiple -- possibly multivariate -- utility functions, we define a certainty equivalent as well as the utility buy and sell prices and indifference price bounds as set-valued functions of the claim. Furthermore, we motivate and introduce the notion of a weak and a strong certainty equivalent. We will show that our definitions contain as special cases some definitions found in the literature so far on complete or special incomplete preferences. We prove monotonicity and convexity properties of utility buy and sell prices that hold in total analogy to the properties of the scalar indifference prices for complete preferences. We show how the (weak and strong) set-valued certainty equivalent as well as the indifference price bounds can be computed or approximated by solving convex vector optimization problems. Numerical examples and their economic interpretations are given for the univariate as well as for the multivariate case.

Suggested Citation

  • Birgit Rudloff & Firdevs Ulus, 2019. "Certainty Equivalent and Utility Indifference Pricing for Incomplete Preferences via Convex Vector Optimization," Papers 1904.09456, arXiv.org, revised Oct 2020.
  • Handle: RePEc:arx:papers:1904.09456
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    References listed on IDEAS

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    Cited by:

    1. Andreas H Hamel & Birgit Rudloff & Zhou Zhou, 2019. "Robust no arbitrage and the solvability of vector-valued utility maximization problems," Papers 1909.00354, arXiv.org.

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