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Asymptotic utility-based pricing and hedging for exponential utility

Author

Listed:
  • Kallsen Jan
  • Rheinländer Thorsten

    (London School of Economics, Department of Statistics, London WC2A 2AE, Großbritannien)

Abstract

This paper deals with pricing and hedging based on utility indifference for exponential utility. We consider the limit for vanishing risk aversion or, equivalently, small quantities of the contingent claim. In first order approximation the utility indifference price and the corresponding hedge can be determined from the corresponding quadratic hedging problem relative to the minimal entropy martingale measure. This extends similar results obtained by Mania and Schweizer [21], Becherer [3], and Kramkov and Sîrbu [20,19].

Suggested Citation

  • Kallsen Jan & Rheinländer Thorsten, 2011. "Asymptotic utility-based pricing and hedging for exponential utility," Statistics & Risk Modeling, De Gruyter, vol. 28(1), pages 17-36, March.
    • Handle: RePEc:bpj:strimo:v:28:y:2011:i:1:p:17-36:n:1
    DOI: 10.1524/stnd.2011.1027
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    References listed on IDEAS

    as
    1. Aytaç İlhan & Ronnie Sircar, 2006. "Optimal Static–Dynamic Hedges For Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 16(2), pages 359-385, April.
    2. Thorsten Rheinländer & Gallus Steiger, 2010. "Utility Indifference Hedging with Exponential Additive Processes," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(2), pages 151-169, June.
    3. Freddy Delbaen & Peter Grandits & Thorsten Rheinländer & Dominick Samperi & Martin Schweizer & Christophe Stricker, 2002. "Exponential Hedging and Entropic Penalties," Mathematical Finance, Wiley Blackwell, vol. 12(2), pages 99-123, April.
    4. Marco Frittelli, 2000. "The Minimal Entropy Martingale Measure and the Valuation Problem in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 39-52, January.
    5. Becherer, Dirk, 2003. "Rational hedging and valuation of integrated risks under constant absolute risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 1-28, August.
    6. Henderson, Vicky & Hobson, David G., 2002. "Real options with constant relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 329-355, December.
    7. Sara Biagini & Marco Frittelli, 2005. "Utility maximization in incomplete markets for unbounded processes," Finance and Stochastics, Springer, vol. 9(4), pages 493-517, October.
    8. Michael Mania & Martin Schweizer, 2005. "Dynamic exponential utility indifference valuation," Papers math/0508489, arXiv.org.
    9. Yuri M. Kabanov & Christophe Stricker, 2002. "On the optimal portfolio for the exponential utility maximization: remarks to the six‐author paper," Mathematical Finance, Wiley Blackwell, vol. 12(2), pages 125-134, April.
    10. Jan Kallsen, 2002. "Derivative pricing based on local utility maximization," Finance and Stochastics, Springer, vol. 6(1), pages 115-140.
    11. Richard Rouge & Nicole El Karoui, 2000. "Pricing Via Utility Maximization and Entropy," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 259-276, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Michael Monoyios, 2012. "Malliavin calculus method for asymptotic expansion of dual control problems," Papers 1209.6497, arXiv.org, revised Oct 2013.
    2. Jan Kallsen & Johannes Muhle-Karbe, 2012. "Option Pricing and Hedging with Small Transaction Costs," Papers 1209.2555, arXiv.org, revised Dec 2012.

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