Risk-indifference Pricing of American-style Contingent Claims

Rohini Kumar, Frederick "Forrest" Miller, Hussein Nasralah and Stephan Sturm

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Abstract: This paper studies the pricing of contingent claims of American style, using indifference pricing by fully dynamic convex risk measures. We provide a general definition of risk-indifference prices for buyers and sellers in continuous time, in a setting where buyer and seller have potentially different information, and show that these definitions are consistent with no-arbitrage principles. Specifying to stochastic volatility models, we characterize indifference prices via solutions of Backward Stochastic Differential Equations reflected at Backward Stochastic Differential Equations and show that this characterization provides a basis for the implementation of numerical methods using deep learning.

Date: 2024-08
New Economics Papers: this item is included in nep-ipr
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