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Register a new userConvergence of utility indifference prices to the superreplication price in a multiple-priors framework
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Added by
Laurence Carassus
Publication date
2017
fields
Financial
and research's language is
English
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This paper formulates an utility indifference pricing model for investors trading in a discrete time financial market under non-dominated model uncertainty. The investors preferences are described by strictly increasing concave random functions defined on the positive axis. We prove that under suitable conditions the multiple-priors utility indifference prices of a contingent claim converge to its multiple-priors superreplication price. We also revisit the notion of certainty equivalent for random utility functions and establish its relation with the absolute risk aversion.
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This paper considers utility indifference valuation of derivatives under model uncertainty and trading constraints, where the utility is formulated as an additive stochastic differential utility of both intertemporal consumption and terminal wealth, and the uncertain prospects are ranked according to a multiple-priors model of Chen and Epstein (2002). The price is determined by two optimal stochastic control problems (mixed with optimal stopping time in the case of American option) of forward-backward stochastic differential equations. By means of backward stochastic differential equation and partial differential equation methods, we show that both bid and ask prices are closely related to the Black-Scholes risk-neutral price with modified dividend rates. The two prices will actually coincide with each other if there is no trading constraint or the model uncertainty disappears. Finally, two applications to European option and American option are discussed.
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