Nash equilibria for game contingent claims with utility-based hedging

DOI10.1137/17M1141059;MaRDI QIDQ4553299zbMATH OpenFDO

Authors Klebert Kentia, Christoph Kühn

Publication date 2 November 2018

Published in SIAM Journal on Control and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1707.09351, https://epubs.siam.org/doi/pdf/10.1137/17M1141059

zbMATH Keywords

incomplete marketsNash equilibriagame contingent claimsexponential utility indifference valuationnon-zero-sum Dynkin gamesoptimal stopping under nonlinear expectation

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Utility theory (91B16) Stopping times; optimal stopping problems; gambling theory (60G40) Stochastic games, stochastic differential games (91A15) Games of timing (91A55)

Abstract: Game contingent claims (GCCs) generalize American contingent claims by allowing the writer to recall the option as long as it is not exercised, at the price of paying some penalty. In incomplete markets, an appealing approach is to analyze GCCs like their European and American counterparts by solving option holder's and writer's optimal investment problems in the underlying securities. By this, partial hedging opportunities are taken into account. We extend results in the literature by solving the stochastic game corresponding to GCCs with both continuous time stopping and trading. Namely, we construct Nash equilibria by rewriting the game as a non-zero-sum stopping game in which players compare payoffs in terms of their exponential utility indifference values. As a by-product, we also obtain an existence result for the optimal exercise time of an American claim under utility indifference valuation by relating it to the corresponding nonlinear Snell envelope.

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Cited in

(4)

• Mechanics of good trade execution in the framework of linear temporary market impact
• Hedging game contingent claims
• Stackelberg game model of railway freight pricing based on option theory
• A theory approach towards tradable rail freight option

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