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Utility Indifference Pricing: A Time Consistent Approach

Utility Indifference Pricing: A Time Consistent Approach Abstract This article considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion that changes with the regime. The market model is incomplete and there are two risky assets: tradable and non-tradable. In this context, the optimal investment strategies are time inconsistent. Consequently, the subgame perfect equilibrium strategies are considered. The utility indifference ask price of a contingent claim written on the risky assets is computed through an indifference valuation algorithm. By running numerical experiments, we examine how this price varies in response to changes in model parameters. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

Utility Indifference Pricing: A Time Consistent Approach

Pirvu, Traian A.; Zhang, Huayue
Applied Mathematical Finance , Volume 20 (4): 23 – Sep 1, 2013
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Utility Indifference Pricing: A Time Consistent Approach

Abstract

Abstract This article considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion that changes with the regime. The market model is incomplete and there are two risky assets: tradable and non-tradable. In this context, the optimal investment strategies are time inconsistent. Consequently, the subgame perfect equilibrium strategies are...
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Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/1350486X.2012.700575
Publisher site
See Article on Publisher Site

Abstract

Abstract This article considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion that changes with the regime. The market model is incomplete and there are two risky assets: tradable and non-tradable. In this context, the optimal investment strategies are time inconsistent. Consequently, the subgame perfect equilibrium strategies are considered. The utility indifference ask price of a contingent claim written on the risky assets is computed through an indifference valuation algorithm. By running numerical experiments, we examine how this price varies in response to changes in model parameters.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Sep 1, 2013

Keywords: time consistency; time inconsistent control; incomplete market; utility indifference price

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