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Utility Indifference Pricing in an Incomplete Market Model with Incomplete Information


  • Kazuhiro Takino

    () (Graduate School of Economics, Osaka University)


In this article, we consider a derivative pricing model for the stochastic volatility model under an incomplete information. The incomplete information in our works, supposes that the true value of the drift for the stock price process is a random variable, investors only have an information of its distribution. This is more practical financial market than the situation with knowledge of the drift. There are many studies about the dynamic portfolio optimization problem under the incomplete information. In that situation, the corresponding problem becomes a easy to treat by Separating Principle and Bayesian updating formula. We apply these arguments to the utility indifference price approach, and present pricing method taken into account the incomplete information. On the other hand, Sircar and Zariphopoulou (2005) gives bounds and asymptotic approximations for the indifference prices in the stochastic volatility model. In them works, bounds include the drift parameter for the underlying price process. However, in practice, it is able to observe the drift parameter by estimation only. Therefore, it is meaningful to extended to the incomplete information. We derive bounds for the indifference prices using estimated drift, and the relationship between the buyer fs indifference price and the seller fs one.

Suggested Citation

  • Kazuhiro Takino, 2007. "Utility Indifference Pricing in an Incomplete Market Model with Incomplete Information," Discussion Papers in Economics and Business 07-46, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:0746

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    References listed on IDEAS

    1. Hayashi, Fumio & Inoue, Tohru, 1991. "The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," Econometrica, Econometric Society, vol. 59(3), pages 731-753, May.
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    Cited by:

    1. Gunther Leobacher & Philip Ngare, 2014. "Utility indifference pricing of derivatives written on industrial loss indexes," Papers 1404.0879,

    More about this item


    Incomplete market; Incomplete information; Utility indifference price; Bayesian updating formula; Super/sub solution for PDEs.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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