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Comparison of utility indifference pricing and mean-variance approach under a normal mixture distribution with time-varying volatility

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  • Hodoshima, Jiro
  • Yamawake, Toshiyuki

Abstract

We evaluate a utility indifference price with an exponential utility function, which we call a risk-sensitive value measure, under a normal mixture distribution with time-varying volatility. We compare the risk-sensitive value measure and mean-variance approach and provide an empirical application.

Suggested Citation

  • Hodoshima, Jiro & Yamawake, Toshiyuki, 2019. "Comparison of utility indifference pricing and mean-variance approach under a normal mixture distribution with time-varying volatility," Finance Research Letters, Elsevier, vol. 28(C), pages 74-81.
    • Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:74-81
    DOI: 10.1016/j.frl.2018.04.006
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    References listed on IDEAS

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    6. Hodoshima, Jiro & Misawa, Tetsuya & Miyahara, Yoshio, 2018. "Comparison of utility indifference pricing and mean-variance approach under normal mixture," Finance Research Letters, Elsevier, vol. 24(C), pages 221-229.
    7. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Value measure; Utility indifference pricing; Normal mixture; GARCH;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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