UTILITY BASED PRICING AND HEDGING OF JUMP DIFFUSION PROCESSES WITH A VIEW TO APPLICATIONS

Jochen Zahn ()
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Jochen Zahn: Courant Research Centre "Higher Order Structures", University of Göttingen, Bunsenstraße 3-5, D-37073 Göttingen, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 07, 1-22

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.

Keywords: Incomplete markets; hedging; valuation; utility maximization; jump diffusion processes; functional differentiation (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S0219024912500525

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