Utility based pricing and hedging of jump diffusion processes with a view to applications

Jochen Zahn

Papers from arXiv.org

Abstract: We discuss utility based pricing and hedging of jump diffusion processes with emphasis on the practical applicability of the framework. We point out two difficulties that seem to limit this applicability, namely drift dependence and essential risk aversion independence. We suggest to solve these by a re-interpretation of the framework. This leads to the notion of an implied drift. We also present a heuristic derivation of the marginal indifference price and the marginal optimal hedge that might be useful in numerical computations.

Date: 2011-06, Revised 2012-12
New Economics Papers: this item is included in nep-upt
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Published in International Journal of Theoretical and Applied Finance 15 (2012) 1250052

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1106.1395

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