Zero-Level Pricing and the HARA Utility Functions

S. M. Guu () and J. N. Wang
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S. M. Guu: Yuan Ze University
J. N. Wang: Yuan Ze University

Journal of Optimization Theory and Applications, 2008, vol. 139, issue 2, No 12, 393-402

Abstract: Abstract In the mathematical economics literature, the zero-level pricing method has been proposed to provide a unique price for a nonmarketable new asset. From the viewpoint of robust pricing theory, its disadvantage is that the method depends on the investor utility function and initial wealth. In some situations, the zero-level price is universal, namely, independent of the utility function and initial wealth. We show that only one parameter of the HARA (hyperbolic absolute risk aversion) utility function affects the zero-level price of a new asset. This implies that, if this parameter is fixed, the zero-level price is identical for all individuals with HARA utility functions and different levels of initial wealth.

Keywords: Asset pricing; Zero-level pricing; Hyperbolic absolute risk aversion utility; Maximization (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/s10957-008-9420-4

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