Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

DOI10.1142/S0219024922500170zbMATH Open1498.91460arXiv1909.06260OpenAlexW3125895983WikidataQ115523128 ScholiaQ115523128MaRDI QIDQ5866972FDOQ5866972

Authors: Alet Roux, Zhikang Xu 

Publication date: 22 September 2022

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: We consider indifference pricing of contingent claims consisting of payment flows in a discrete time model with proportional transaction costs and under exponential disutility. This setting covers utility maximisation as a special case. A dual representation is obtained for the associated disutility minimisation problem, together with a dynamic procedure for solving it. This leads to efficient and convergent numerical procedures for indifference pricing, optimal trading strategies and shadow prices that apply to a wide range of payoffs, a large range of time steps and all magnitudes of transaction costs.

Full work available at URL: https://arxiv.org/abs/1909.06260

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zbMATH Keywords

entropydynamic programmingoption pricingtransaction costsutility maximizationindifference pricinggeneralized convex hull

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10)

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Cited In (6)

• On optimal investment and subexponential claims
• Exact solutions and approximations for optimal investment strategies and indifference prices
• Exponential utility of indifference prices and hedging strategies with transaction costs
• Pricing a contingent claim liability with transaction costs using asymptotic analysis for optimal investment
• A note on utility-based pricing in models with transaction costs
• General indifference pricing with small transaction costs

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