Bounded solutions to backward SDEs with jumps for utility optimization and indifference hedging

DOI10.1214/105051606000000475zbMATH Open1132.91457arXivmath/0702405OpenAlexW3101821180MaRDI QIDQ997416FDOQ997416

Authors: Dirk Becherer 

Publication date: 6 August 2007

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We prove results on bounded solutions to backward stochastic equations driven by random measures. Those bounded BSDE solutions are then applied to solve different stochastic optimization problems with exponential utility in models where the underlying filtration is noncontinuous. This includes results on portfolio optimization under an additional liability and on dynamic utility indifference valuation and partial hedging in incomplete financial markets which are exposed to risk from unpredictable events. In particular, we characterize the limiting behavior of the utility indifference hedging strategy and of the indifference value process for vanishing risk aversion.

Full work available at URL: https://arxiv.org/abs/math/0702405

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zbMATH Keywords

entropybackward stochastic differential equationshedgingincomplete marketsrandom measuresutility optimizationdynamic indifference valuation

Mathematics Subject Classification ID

Point processes (e.g., Poisson, Cox, Hawkes processes) (60G55) Random measures (60G57) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30) Stochastic analysis (60H99)

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