The pricing of contingent claims and optimal positions in asymptotically complete markets

DOI10.1214/16-AAP1246MaRDI QIDQ2403142zbMATH OpenFDO

Authors Michail Anthropelos, Scott Robertson, Konstantinos Spiliopoulos

Publication date 15 September 2017

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1509.06210

zbMATH Keywords

incomplete marketsutility functionsindifference pricinglarge position size

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Large deviations (60F10) Generalizations of martingales (60G48) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10)

Abstract: We study utility indifference prices and optimal purchasing quantities for a contingent claim, in an incomplete semi-martingale market, in the presence of vanishing hedging errors and/or risk aversion. Assuming that the average indifference price converges to a well defined limit, we prove that optimally taken positions become large in absolute value at a specific rate. We draw motivation from and make connections to Large Deviations theory, and in particular, the celebrated G"{a}rtner-Ellis theorem. We analyze a series of well studied examples where this limiting behavior occurs, such as fixed markets with vanishing risk aversion, the basis risk model with high correlation, models of large markets with vanishing trading restrictions and the Black-Scholes-Merton model with either vanishing default probabilities or vanishing transaction costs. Lastly, we show that the large claim regime could naturally arise in partial equilibrium models.

Recommendations

• Indifference pricing for contingent claims: large deviations effects
• Pricing for large positions in contingent claims
• Asymptotic pricing in large financial markets
• Asymptotic utility-based pricing and hedging for exponential utility
• Claim pricing and hedging under market incompleteness and ``mean-variance preferences

Cited in

(18)

• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model
• scientific article; zbMATH DE number 5885646 (Why is no real title available?)
• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
• Short Communication: Utility Indifference Pricing with High Risk Aversion and Small Linear Price Impact
• On the Stability of Prices of Contingent Claims in Incomplete Models Under Statistical Estimations
• Asymptotic pricing in large financial markets
• A convex duality approach for pricing contingent claims under partial information and short selling constraints
• Optimal investment, derivative demand, and arbitrage under price impact
• Expected gain-loss pricing and hedging of contingent claims in incomplete markets by linear programming
• Pricing for large positions in contingent claims
• Indifference pricing for contingent claims: large deviations effects
• Contingent claims valuation when the security price is a combination of an Itō process and a random point process
• The Dynamicq-Valuation of a Contingent Claim in a Continuous Market Model
• Pricing of contingent claims in large markets
• A new market model in the large volatility case
• On the density of properly maximal claims in financial markets with transaction costs
• Sharpe-ratio pricing and hedging of contingent claims in incomplete markets by convex programming
• Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market

This page was built for publication: The pricing of contingent claims and optimal positions in asymptotically complete markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2403142)