AN APPROXIMATE APPROACH TO THE EXPONENTIAL UTILITY INDIFFERENCE VALUATION

Takuji Arai ()
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Takuji Arai: Department of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 03, 475-503

Abstract: We propose, in this paper, a new valuation method for contingent claims, which approximates to the exponential utility indifference valuation. In particular, we treat both ask and bid valuations. In the definition of the exponential utility indifference valuation, we require strong integrability for the underlying contingent claim. The new valuation in this paper succeeds in reducing it by using a kind of power functions instead of the exponential function. Furthermore, we shall investigate some basic properties and an asymptotic behavior of the new valuation.

Keywords: Incomplete markets; indifference value; p-optimal martingale measure; Reverse hölder inequality (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S0219024907004299

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