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Indifference pricing and hedging in a multiple-priors model with trading constraints

Research output: Contribution to journalArticle

HuiWen Yan, Gechun Liang, Zhou Yang

Original languageEnglish
Pages (from-to)689-714
Number of pages26
JournalScience China Mathematics
Issue number4
Publication statusPublished - Apr 2015


  • 1503.08969v1

    1503.08969v1.pdf, 365 KB, application/pdf


    Submitted manuscript


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  • King's College London


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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