Utility indifference valuation for non-smooth payoffs with an application to power derivatives
From MaRDI portal
(Redirected from Publication:282083)
backward stochastic differential equationsviscosity solutionselectricity marketsoptimal investmentutility indifference pricing
Stochastic calculus of variations and the Malliavin calculus (60H07) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80) Duality theory (optimization) (49N15)
Abstract: We consider the problem of exponential utility indifference valuation under the simplified framework where traded and nontraded assets are uncorrelated but where the claim to be priced possibly depends on both. Traded asset prices follow a multivariate Black and Scholes model, while nontraded asset prices evolve as generalized Ornstein-Uhlenbeck processes. We provide a BSDE characterization of the utility indifference price (UIP) for a large class of non-smooth, possibly unbounded, payoffs depending simultaneously on both classes of assets. Focusing then on European claims and using the Gaussian structure of the model allows us to employ some BSDE techniques (in particular, a Malliavin-type representation theorem due to Ma (2002)) to prove the regularity of Z and to characterize the UIP for possibly discontinuous European payoffs as a viscosity solution of a suitable PDE with continuous space derivatives. The optimal hedging strategy is also identified essentially as the delta hedging strategy corresponding to the UIP. Since there are no closed-form formulas in general, we also obtain asymptotic expansions for prices and hedging strategies when the risk aversion parameter is small. Finally, our results are applied to pricing and hedging power derivatives in various structural models for energy markets.
Recommendations
- Utility indifference pricing and hedging for structured contracts in energy markets
- Dynamic exponential utility indifference valuation
- Asymptotic power utility-based pricing and hedging
- Any-utility neutral and indifference pricing and hedging
- Utility indifference pricing and hedging to stochastic volatility model
Cites work
- scientific article; zbMATH DE number 3425963 (Why is no real title available?)
- scientific article; zbMATH DE number 5529013 (Why is no real title available?)
- scientific article; zbMATH DE number 3505708 (Why is no real title available?)
- scientific article; zbMATH DE number 1222796 (Why is no real title available?)
- A DIFFUSION MODEL FOR ELECTRICITY PRICES
- A guided tour through quadratic hedging approaches
- A multidimensional exponential utility indifference pricing model with applications to counterparty risk
- A probabilistic numerical method for optimal multiple switching problems in high dimension
- A structural risk-neutral model for pricing and hedging power derivatives
- A survey and some generalizations of Bessel processes
- Adapted solution of a backward stochastic differential equation
- Backward stochastic differential equations and partial differential equations with quadratic growth.
- Bounded solutions to backward SDEs with jumps for utility optimization and indifference hedging
- Bounds and Asymptotic Approximations for Utility Prices when Volatility is Random
- Bounds for the utility-indifference prices of non-traded assets in incomplete markets
- Controlled Markov processes and viscosity solutions
- Differentiability of quadratic BSDEs generated by continuous martingales
- Electricity price modeling and asset valuation: a multi-fuel structural approach
- Exponential utility indifference valuation in two Brownian settings with stochastic correlation
- Forward-backward stochastic differential equations and their applications
- Malliavin calculus method for asymptotic expansion of dual control problems
- OPTIMAL INVESTMENT WITH AN UNBOUNDED RANDOM ENDOWMENT AND UTILITY‐BASED PRICING
- Pricing and hedging of derivatives based on nontradable underlyings
- Pricing via utility maximization and entropy.
- Quadratic BSDEs with convex generators and unbounded terminal conditions
- Rational hedging and valuation of integrated risks under constant absolute risk aversion.
- Representation of solutions to BSDEs associated with a degenerate FSDE
- Representation theorems for backward stochastic differential equations
- Smooth solutions to optimal investment models with stochastic volatilities and portfolio constraints
- Utility maximization in incomplete markets
- VALUATION OF CLAIMS ON NONTRADED ASSETS USING UTILITY MAXIMIZATION
Cited in
(13)- Any-utility neutral and indifference pricing and hedging
- Indifference pricing of insurance-linked securities in a multi-period model
- Indifference pricing and hedging in a multiple-priors model with trading constraints
- Utility indifference pricing and hedging for structured contracts in energy markets
- On the parabolic equation for portfolio problems
- Indifference pricing of a power utility function under a discrete-time model
- Valuation of power plants by utility indifference and numerical computation
- Pseudo linear pricing rule for utility indifference valuation
- Indifference pricing for CRRA utilities
- Pricing and hedging of derivatives based on nontradable underlyings
- Asymptotic power utility-based pricing and hedging
- Utility–indifference hedging and valuation via reaction–diffusion systems
- Exponential utility indifference valuation in two Brownian settings with stochastic correlation
This page was built for publication: Utility indifference valuation for non-smooth payoffs with an application to power derivatives
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q282083)
