Sensitivity analysis of utility-based prices and risk-tolerance wealth processes

DOI10.1214/105051606000000529zbMATH Open1132.91426arXivmath/0702413OpenAlexW2133825509MaRDI QIDQ997422FDOQ997422

Authors: Dmitry Kramkov, Mihai Sîrbu 

Publication date: 6 August 2007

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

Abstract: In the general framework of a semimartingale financial model and a utility function $U$ defined on the positive real line, we compute the first-order expansion of marginal utility-based prices with respect to a ``small number of random endowments. We show that this linear approximation has some important qualitative properties if and only if there is a risk-tolerance wealth process. In particular, they hold true in the following polar cases: �egin{tabular}@p97mm@ for any utility function $U$, if and only if the set of state price densities has a greatest element from the point of view of second-order stochastic dominance;for any financial model, if and only if $U$ is a power utility function ($U$ is an exponential utility function if it is defined on the whole real line). end{tabular}

Full work available at URL: https://arxiv.org/abs/math/0702413

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zbMATH Keywords

stochastic dominanceutility maximizationhedgingincomplete marketsrandom endowmentrisk-aversioncontingent claimrisk-toleranceutility-based valuation

Mathematics Subject Classification ID

Nonconvex programming, global optimization (90C26) Utility theory (91B16)

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Cited In (44)

• Overview of utility-based valuation
• A note on utility-based pricing
• Utility maximization problem with transaction costs: optimal dual processes and stability
• Corrections to the prices of derivatives due to market incompleteness
• In which financial markets do mutual fund theorems hold true?
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• Sensitivity of optimal consumption streams
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• OPTIMAL INVESTMENT WITH INTERMEDIATE CONSUMPTION AND RANDOM ENDOWMENT
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• UTILITY BASED PRICING AND HEDGING OF JUMP DIFFUSION PROCESSES WITH A VIEW TO APPLICATIONS
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