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A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

Vicky Henderson and Gechun Liang ()

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Abstract: This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model subject to inter-temporal default risk, and provides a semigroup approximation for the utility indifference price. The key tool is the splitting method, whose convergence is proved based on the Barles-Souganidis monotone scheme, and the convergence rate is derived based on Krylov's shaking the coefficients technique. We apply our methodology to study the counterparty risk of derivatives in incomplete markets.

Date: 2011-11, Revised 2015-09
New Economics Papers: this item is included in nep-upt
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