PRICING FOR LARGE POSITIONS IN CONTINGENT CLAIMS
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Publication:5283402
DOI10.1111/MAFI.12107zbMATH Open1377.91161arXiv1202.4007OpenAlexW2163100419MaRDI QIDQ5283402FDOQ5283402
Publication date: 21 July 2017
Published in: Mathematical Finance (Search for Journal in Brave)
Abstract: Approximations to utility indifference prices are provided for a contingent claim in the large position size limit. Results are valid for general utility functions on the real line and semi-martingale models. It is shown that as the position size approaches infinity, the utility function's decay rate for large negative wealths is the primary driver of prices. For utilities with exponential decay, one may price like an exponential investor. For utilities with a power decay, one may price like a power investor after a suitable adjustment to the rate at which the position size becomes large. In a sizable class of diffusion models, limiting indifference prices are explicitly computed for an exponential investor. Furthermore, the large claim limit is seen to endogenously arise as the hedging error for the claim vanishes.
Full work available at URL: https://arxiv.org/abs/1202.4007
Derivative securities (option pricing, hedging, etc.) (91G20) Generalizations of martingales (60G48) Utility theory (91B16)
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- INDIFFERENCE PRICING FOR CONTINGENT CLAIMS: LARGE DEVIATIONS EFFECTS
- Optimal investment, derivative demand, and arbitrage under price impact
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