Exponential utility indifference valuation in a general semimartingale model
- Working Paper
We study the exponential utility indifference valuation of a contingent claim H when asset prices are given by a general semimartingale S. Under mild assumptions on H and S, we prove that a no-arbitrage type condition is fulfilled if and only if H has a certain representation. In this case, the indifference value can be written in terms of processes from that representation, which is useful in two ways. Firstly, it yields an interpolation expression for the indifference value which generalizes the explicit formulas known for Brownian models. Secondly, we show that the indifference value process is the first component of the unique solution (in a suitable class of processes) of a backward stochastic differential equation. Under additional assumptions, the other components of this solution are BMO-martingales for the minimal entropy martingale measure. This generalizes recent results by Becherer  and Mania and Schweizer . Mehr anzeigen
Zeitschrift / SerieWorking paper series
VerlagNational Centre of Competence in Research
Themaexponential utility; indifference valuation; minimal entropy martingale measure; BSDE; BMO-martingales; fundamental entropy representation (FER)
Organisationseinheit03658 - Schweizer, Martin / Schweizer, Martin
AnmerkungenFirst version August 2008, Current version August 2008.