Exponential utility maximization and indifference valuation with unbounded payoffs

MaRDI QIDQ6288526zbMATH OpenFDO

Authors Ying Hu, Gechun Liang, Shanjian Tang

Publication date 1 July 2017

Mathematics Subject Classification ID

Credit risk (91G40) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80)

Abstract: We solve an exponential utility maximization problem with unbounded payoffs and portfolio constraints, via the theory of quadratic backward stochastic differential equations with unbounded terminal data. This generalizes the previous work of Hu et al. (2005) [Ann. Appl. Probab., 15, 1691--1712] from the bounded to an unbounded framework. Furthermore, we study utility indifference valuation of financial derivatives with unbounded payoffs, and derive a novel convex dual representation of the prices. In particular, we obtain new asymptotic behavior as the risk aversion parameter tends to either zero or infinity.

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