A valuation algorithm for indifference prices in incomplete markets |
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| Authors: | Email author" target="_blank">Marek?MusielaEmail author Thaleia?Zariphopoulou |
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| Institution: | (1) BNP Paribas, 10 Harewood Avenue, NW1 6AA London, UK;(2) Departments of Mathematics and Management Science and Information Systems, The University of Texas at Austin, 78712 Austin, TX, USA |
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| Abstract: | A probabilistic iterative algorithm is constructed for indifference prices of claims in a multiperiod incomplete model. At each time step, a nonlinear pricing functional is applied that isolates and prices separately the two types of risk. It is represented solely in terms of risk aversion and the pricing measure, a martingale measure that preserves the conditional distribution of unhedged risks, given the hedgeable ones, from their historical counterparts.Received: 1 September 2003, Mathematics Subject Classification:
93E20, 60G40, 60J75JEL Classification:
C61, G11, G13The second author acknowledges partial support from NSF Grants DMS 0102909 and DMS 0091946. |
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| Keywords: | Incomplete markets indifference prices nonlinear pricing algorithm |
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