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

DOI10.1214/105051606000000529zbMATH Open1132.91426OpenAlexW2133825509MaRDI QIDQ997422FDOQ997422

Authors Dmitry Kramkov, Mihai Sîrbu 

Publication date 6 August 2007

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

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

zbMATH Keywords

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

Mathematics Subject Classification ID

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

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}

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Cites Work

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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?
• A general multidimensional Monte Carlo approach for dynamic hedging under stochastic volatility
• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
• Do arbitrage-free prices come from utility maximization?
• Sensitivity of optimal consumption streams
• Modeling non-monotone risk aversion using SAHARA utility functions
• Convergence rates of large-time sensitivities with the Hansen-Scheinkman decomposition
• Exact solutions and approximations for optimal investment strategies and indifference prices
• Utility‐based pricing and hedging of contingent claims in Almgren‐Chriss model with temporary price impact
• Trading with small nonlinear price impact
• Stability and asymptotic analysis of the Föllmer-Schweizer decomposition on a finite probability space
• Evolution of the Arrow-Pratt measure of risk-tolerance for predictable forward utility processes
• Utility maximization in affine stochastic volatility models
• Optimal static-dynamic hedges for exotic options under convex risk measures
• Ramsey rule with forward/backward utility for long-term yield curves modeling
• An expansion in the model space in the context of utility maximization
• A class of stochastic Fredholm-algebraic equations and applications in finance
• On agent's agreement and partial-equilibrium pricing in incomplete markets
• Utility maximization, risk aversion, and stochastic dominance
• Indifference pricing for CRRA utilities
• Forward indifference valuation of American options
• The general structure of optimal investment and consumption with small transaction costs
• Sensitivity analysis of the utility maximisation problem with respect to model perturbations
• Abstract, classic, and explicit turnpikes
• Variance-Optimal Hedging in General Affine Stochastic Volatility Models
• On the two-times differentiability of the value functions in the problem of optimal investment in incomplete markets
• Asymptotic power utility-based pricing and hedging
• On the closure in the emery topology of semimartingale wealth-process sets
• Asymptotic analysis of utility-based hedging strategies for small number of contingent claims
• Optimal investment and price dependence in a semi-static market
• Portfolios and risk premia for the long run
• Pricing for large positions in contingent claims
• Conditional Davis pricing
• Utility based pricing and hedging of jump diffusion processes with a view to applications
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• Pricing of contingent claims in large markets
• Optimal investment with random endowments and transaction costs: duality theory and shadow prices
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• Optimal investment with intermediate consumption and random endowment
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