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

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Indifference pricing and hedging in a multiple-priors model with trading constraints. / Yan, HuiWen; Liang, Gechun; Yang, Zhou.

In: Science China Mathematics, Vol. 58, No. 4, 04.2015, p. 689-714.

Research output: Contribution to journalArticle

Harvard

Yan, H, Liang, G & Yang, Z 2015, 'Indifference pricing and hedging in a multiple-priors model with trading constraints', Science China Mathematics, vol. 58, no. 4, pp. 689-714. https://doi.org/10.1007/s11425-014-4885-0

APA

Yan, H., Liang, G., & Yang, Z. (2015). Indifference pricing and hedging in a multiple-priors model with trading constraints. Science China Mathematics, 58(4), 689-714. https://doi.org/10.1007/s11425-014-4885-0

Vancouver

Yan H, Liang G, Yang Z. Indifference pricing and hedging in a multiple-priors model with trading constraints. Science China Mathematics. 2015 Apr;58(4):689-714. https://doi.org/10.1007/s11425-014-4885-0

Author

Yan, HuiWen ; Liang, Gechun ; Yang, Zhou. / Indifference pricing and hedging in a multiple-priors model with trading constraints. In: Science China Mathematics. 2015 ; Vol. 58, No. 4. pp. 689-714.

Bibtex Download

@article{f0b98452b16e4e5d8d9a85ccb238494d,
title = "Indifference pricing and hedging in a multiple-priors model with trading constraints",
abstract = "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.",
keywords = "ambiguity, American option, indifference pricing, stochastic differential utility, trading constraints, variational inequality",
author = "HuiWen Yan and Gechun Liang and Zhou Yang",
year = "2015",
month = apr,
doi = "10.1007/s11425-014-4885-0",
language = "English",
volume = "58",
pages = "689--714",
journal = "Science China Mathematics",
issn = "1674-7283",
publisher = "Science in China Press",
number = "4",

}

RIS (suitable for import to EndNote) Download

TY - JOUR

T1 - Indifference pricing and hedging in a multiple-priors model with trading constraints

AU - Yan, HuiWen

AU - Liang, Gechun

AU - Yang, Zhou

PY - 2015/4

Y1 - 2015/4

N2 - 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.

AB - 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.

KW - ambiguity

KW - American option

KW - indifference pricing

KW - stochastic differential utility

KW - trading constraints

KW - variational inequality

U2 - 10.1007/s11425-014-4885-0

DO - 10.1007/s11425-014-4885-0

M3 - Article

VL - 58

SP - 689

EP - 714

JO - Science China Mathematics

JF - Science China Mathematics

SN - 1674-7283

IS - 4

ER -

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