Explicit Representations for Utility Indifference Prices

21 Pages Posted: 1 Feb 2021 Last revised: 10 Mar 2021

See all articles by Markus Hess

Markus Hess

Université Libre de Bruxelles (ULB)

Date Written: December 18, 2020

Abstract

In this paper, we apply stochastic maximum principles to derive representations for exponential utility indifference prices. We also obtain the related optimal portfolio processes and utility indifference hedging strategies. To illustrate our theoretical results, we present several concrete examples and study the limit behavior of utility indifference prices for vanishing and infinite risk aversion. We further investigate how the optimal trading strategies and utility indifference prices alter, if one assumes that an investor has some additional information on the future behavior of the underlying stock price process available. In this regard, we propose a customized enlarged filtration approach and deduce a formula for the utility indifference price in this extended setup. We finally provide a representation for the information premium in our utility indifference pricing framework.

Keywords: utility indifference price, contingent claim, wealth process, risk aversion, information premium, stochastic control problem, stochastic maximum principle, enlarged filtration

JEL Classification: C02, C61, D81, G11, G12, G14, G22

Suggested Citation

Hess, Markus, Explicit Representations for Utility Indifference Prices (December 18, 2020). Available at SSRN: https://ssrn.com/abstract=3751344 or http://dx.doi.org/10.2139/ssrn.3751344

Markus Hess (Contact Author)

Université Libre de Bruxelles (ULB) ( email )

CP 210 Boulevard du Triomphe
Brussels, Brussels 1050
Belgium

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