ROBUST EXPONENTIAL HEDGING AND INDIFFERENCE VALUATION

Keita Owari ()
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Keita Owari: Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8601, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2010, vol. 13, issue 07, 1075-1101

Abstract: We discuss the problem of exponential hedging in the presence of model uncertainty expressed by a set of probability measures. This is a robust utility maximization problem with a contingent claim. We first consider the dual problem which is the minimization of penalized relative entropy over a product set of probability measures, showing the existence and variational characterizations of the solution. These results are applied to the primal problem. Then we consider the robust version of exponential utility indifference valuation, giving the representation of indifference price using a duality result.

Keywords: Model uncertainty; duality; utility maximization; hedging (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0219024910006121

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