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Pseudo linear pricing rule for utility indifference valuation

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Abstract

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model, and provides two linear approximations for the utility indifference price. The key tool is a probabilistic representation for the utility indifference price by the solution of a functional differential equation, which is termed pseudo linear pricing rule. We also provide an alternative derivation of the quadratic BSDE representation for the utility indifference price.

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Notes

  1. We thank one of the referees for the suggestion of this method.

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Acknowledgements

The authors thank the editor Martin Schweizer, an Associate Editor, and two referees for their valuable suggestions, and Damiano Brigo, Rama Cont, David Hobson, Monique Jeanblanc, Lishang Jiang, Eva Lütkebohmert, Andrea Macrina, Shige Peng, Xingye Yue, and Thaleia Zariphopoulou for helpful discussions. The authors thank participants in seminars at the University of Freiburg, and King’s College London, and at the Sino-French Summer Institute in Stochastic Modeling and Applications (Beijing, June 2011), Stochastic Analysis: A UK–China Workshop (Loughborough, July 2011), and the Fourth International Conference: Mathematics in Finance (South Africa, August 2011) where work in progress was presented.

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Authors and Affiliations

  1. Department of Statistics, University of Warwick, Coventry, CV4 7AL, UK

    Vicky Henderson

  2. Oxford-Man Institute, University of Oxford, Oxford, OX2 6ED, UK

    Vicky Henderson & Gechun Liang

  3. Department of Mathematics, King’s College London, London, WC2R 2LS, UK

    Gechun Liang

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  1. Vicky Henderson
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Correspondence to Vicky Henderson.

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Henderson, V., Liang, G. Pseudo linear pricing rule for utility indifference valuation. Finance Stoch 18, 593–615 (2014). https://doi.org/10.1007/s00780-014-0235-x

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  • DOI: https://doi.org/10.1007/s00780-014-0235-x

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