Pricing for large positions in contingent claims
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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.
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Cited in
(8)- Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model
- Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
- Indifference pricing for CRRA utilities
- A scaling limit for utility indifference prices in the discretised Bachelier model
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- Indifference pricing for contingent claims: large deviations effects
- Pricing of contingent claims in large markets
- The pricing of contingent claims and optimal positions in asymptotically complete markets
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