Dynamic exponential utility indifference valuation
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Abstract: We study the dynamics of the exponential utility indifference value process C(B;alpha) for a contingent claim B in a semimartingale model with a general continuous filtration. We prove that C(B;alpha) is (the first component of) the unique solution of a backward stochastic differential equation with a quadratic generator and obtain BMO estimates for the components of this solution. This allows us to prove several new results about C_t(B;alpha). We obtain continuity in B and local Lipschitz-continuity in the risk aversion alpha, uniformly in t, and we extend earlier results on the asymptotic behavior as alphasearrow0 or alpha
earrowinfty to our general setting. Moreover, we also prove convergence of the corresponding hedging strategies.
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