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Optimal Investment And Contingent Claim Valuation With Exponential Disutility Under Proportional Transaction Costs

Author

Listed:
  • ALET ROUX

    (Department of Mathematics, University of York, Heslington YO10 5DD, UK)

  • ZHIKANG XU

    (Barclays, 1 Churchill Place, London, E14 5HP, UK)

Abstract

We consider indifference pricing of contingent claims consisting of payment flows in a discrete-time model with proportional transaction costs and under exponential disutility. This setting covers utility maximization of terminal wealth as a special case. A dual representation is obtained for the associated disutility minimization problem, together with a dynamic procedure for solving it. This leads to efficient and convergent numerical procedures for indifference pricing, optimal trading strategies and shadow prices that apply to a wide range of payoffs, a large range of time steps and all magnitudes of transaction costs.

Suggested Citation

  • Alet Roux & Zhikang Xu, 2022. "Optimal Investment And Contingent Claim Valuation With Exponential Disutility Under Proportional Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 25(04n05), pages 1-45, June.
    • Handle: RePEc:wsi:ijtafx:v:25:y:2022:i:04n05:n:s0219024922500170
    DOI: 10.1142/S0219024922500170
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