A note on utility-based pricing in models with transaction costs (Q2351403): Difference between revisions

The authors study the utility-based and indifference pricing in a market with transaction costs. For an initial capital \(x\in\mathbb R^{d}\), a strategy \(L\) which is a right continuous non-decreasing process, and a continuous semimartingale \(S^{i}\), let us define the portfolio holding \(X=X^{x,L}\in\mathbb R^{d}_{+}\) using the following dynamics: \[ X^{i}_{t}=x^{i}+\hat X^{i}_{-}\cdot S_{t}^{i}+\sum_{j=1}^{d}(L_{t}^{ji}-(1+\lambda^{ij})L^{ij}_{t})\quad i,j=1,\dots,d, \] where \(\hat X^{i}=X^{i}/S^{i}\); \(\hat X^{i}_{-}\cdot S_{t}^{i}\) is the stochastic integral of \(\hat X^{i}_{-}\) with respect to \(S_{t}^{i}\); \(L^{ij}_{t}\) is the cumulative net amount of funds transferred from asset \(i\) to asset \(j\) up to date \(t\) with \(L_{0-}=0\), and the matrix \((\lambda^{ij})\in M^{d}\) (\(M^{d}\) is the set of square matrices with \(d\)-lines and non-negative entries), represents the constant proportional costs with zero diagonal and satisfies \((1+\lambda^{ij})\leq(1+\lambda^{ik})(1+\lambda^{kj})\) \(\forall i,j,k\in \{1,\dots,d\}\). Let an economy specify on investor's preferences, which are described by the utility function \(U=\{U_{i}(x)=-e^{-\gamma_{i}x}, i=1,\dots,n\}\). Each investor's wealth is defined by his portfolio holding \(X^{x,L}\) and contingent claim \(B\) through the liquidation function. An allocation \(q^{*}=\{q_{i}^{*}, i=1,\dots,n\}\) and a price \(p\) of the contingent claim \(B\) constitutes a price equilibrium if an assignment exists such that \(\sum_{i=1}^{n}q^{*}_{i}=0\), for any investor with utility function \(U_{i}\), when the investor holds \(q^{*}_{i}\) units of the contingent claim, \((p,q_{i}^{*})\) is preferred to all other allocations \((p,q_{i}')\). Under the assumption that initial endowments are common for all investors, it is proved that the equilibrium is zero trade in the market with transaction costs in the utility indifference framework and in the utility-based framework.