scholarly journals Certainty equivalent and utility indifference pricing for incomplete preferences via convex vector optimization

2020 ◽  
Author(s):  
Birgit Rudloff ◽  
Firdevs Ulus
Keyword(s):  
Vector Optimization ◽  
Certainty Equivalent ◽  
Incomplete Preferences ◽  
Indifference Pricing ◽  
Convex Vector Optimization ◽  
Utility Indifference Pricing ◽  
Utility Indifference

A NOTE ON UTILITY INDIFFERENCE PRICING

2016 ◽  
Vol 19 (06) ◽  
pp. 1650037
Author(s):  
JOHANNES GERER ◽  
GREGOR DORFLEITNER
Keyword(s):  
Utility Functions ◽  
Indifference Pricing ◽  
Market Incompleteness ◽  
Utility Indifference Pricing ◽  
Marginal Prices ◽  
Utility Indifference ◽  
Contingent Claim Pricing ◽  
The Many ◽  
Many Sources ◽  
Continuous Trading

Utility-based valuation methods are enjoying growing popularity among researchers as a means to overcome the challenges in contingent claim pricing posed by the many sources of market incompleteness. However, we show that under the most common utility functions (including CARA and CRRA), any realistic and actually practicable hedging strategy involving a possible short position has infinitely negative utility. We then demonstrate for utility indifference prices (and also for the related so-called utility-based (marginal) prices) how this problem leads to a severe divergence between results obtained under the assumption of continuous trading and realistic results. The combination of continuous trading and common utility functions is thus not justified in these methods, raising the question of whether and how results obtained under such assumptions could be put to real-world use.

Utility Indifference Pricing and Other Topics

2019 ◽  
pp. 436-440
Author(s):  
Tomas Björk
Keyword(s):  
Incomplete Markets ◽  
Utility Functions ◽  
Equilibrium Theory ◽  
Local Version ◽  
Indifference Pricing ◽  
Discount Factors ◽  
Utility Indifference Pricing ◽  
Stochastic Discount Factors ◽  
Utility Indifference

In this chapter we discuss two methods of pricing in incomplete markets, based on utility functions. This theory comes in the shape of a global and a local version. Both versions are discussed, and for the local version we connect to the theory of stochastic discount factors and equilibrium theory.

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