Chapter Six. Indifference Pricing Of Defaultable Claims

2008 ◽  
pp. 211-240 ◽  
Keyword(s):  
1983 ◽  
Vol 15 (2) ◽  
pp. 150-155 ◽  
Author(s):  
J. W. Foster ◽  
B. L. Deuermeyer ◽  
Tak-Chai Ip
Keyword(s):  

2016 ◽  
Vol 19 (06) ◽  
pp. 1650037
Author(s):  
JOHANNES GERER ◽  
GREGOR DORFLEITNER

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.


2016 ◽  
Vol 28 (1) ◽  
pp. 335-371 ◽  
Author(s):  
Scott Robertson ◽  
Konstantinos Spiliopoulos

2013 ◽  
Vol 4 (2) ◽  
pp. 103-118 ◽  
Author(s):  
Srdjan D. Stojanovic
Keyword(s):  

Author(s):  
Tomas Björk

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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