Pseudo linear pricing rule for utility indifference valuation
type: Item
instance of: scholarly article
title: Pseudo linear pricing rule for utility indifference valuation
zbMATH Open document ID: 1403.91342
author: Vicky Henderson
author: Gechun Liang
published in: Finance and Stochastics
publication date: 2014-09-26T00:00:00Z
full work available at URL: https://arxiv.org/abs/1403.7830
review text: Assume a market with a random source given by a \(d\)-dimensional Brownian motion with a traded financial index \(P\), a bank account \(B\) and \(d\) observable but non traded assets \(S^i\). The goal of the paper is to develop a method of pricing and hedging path dependent contingent claims on the non-traded assets. This problem has been widely studied, see for example [\textit{T. R. Bieleck} and \textit{M. Jeanblanc}, in: Indifference pricing: Theory and applications. Princeton, NJ: Princeton University Press. 211--240 (2009; Zbl 1192.91092)], [\textit{C. Frei} and \textit{M. Schweizer}, in: Optimality and risk -- modern trends in mathematical finance. The Kabanov Festschrift. Berlin: Springer. 49--86 (2009; Zbl 1188.91216)], [the first author and \textit{D. Hobson}, in: Indifference pricing: Theory and applications. Princeton, NJ: Princeton University Press. 44--73 (2009; Zbl 1158.91379)] and [\textit{S. Ankirchner} et al., Math. Finance 20, No. 2, 289--312 (2010; Zbl 1217.91178)]. It is known that using utility indifference valuation (Definition 2.2 in the paper) the investor can determine the price of \(\lambda\) units of the contingent claim \(C_t^{\lambda}\) solving a quadratic BSDE (Theorem 2.3). In the paper, an alternative proof from the risk-sensitive control viewpoint is presented. The martingale optimality principle is not used, as in the previous literature, for example in [Ankirchner et al., loc. cit.]. In Theorem 3.1, the main result of the paper, it is shown the utility indifference price \(C^{\lambda}_t\) can be represented as a linear conditional expectation in terms of the unique solution of a functional differential equation, that runs forward in time and it is simpler than the previous BSDE. This gives a remarkable simplification of the representation of \(C^{\lambda}_t\) (Formula 3.3), called pseudo linear pricing rule. The idea of transforming BSDEs to functional differential equations come from [\textit{G. Liang} et al., Ann. Probab. 39, No.…
reviewed by: Josep Vives
Mathematics Subject Classification ID: 91G20
Mathematics Subject Classification ID: 91G80
Mathematics Subject Classification ID: 60H30
Mathematics Subject Classification ID: 34K50
zbMATH DE Number: 6348474
zbMATH Keywords: utility indifference pricing
zbMATH Keywords: quadratic BSDE
zbMATH Keywords: functional differential equation
zbMATH Keywords: FBSDE
MaRDI profile type: MaRDI publication profile
OpenAlex ID: W2128316369
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DOI: 10.1007/S00780-014-0235-X
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description: scientific article; zbMATH DE number 6348474