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Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

Alet Roux and Zhikang Xu

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Abstract: We consider indifference pricing of contingent claims consisting of payment flows in a discrete time model with proportional transaction costs and under exponential disutility. This setting covers utility maximisation as a special case. A dual representation is obtained for the associated disutility minimisation problem, together with a dynamic procedure for solving it. This leads to efficient and convergent numerical procedures for indifference pricing, optimal trading strategies and shadow prices that apply to a wide range of payoffs, a large range of time steps and all magnitudes of transaction costs.

Date: 2019-09, Revised 2021-05
New Economics Papers: this item is included in nep-upt
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Handle: RePEc:arx:papers:1909.06260