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A valuation algorithm for indifference prices in incomplete markets

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Abstract.

A probabilistic iterative algorithm is constructed for indifference prices of claims in a multiperiod incomplete model. At each time step, a nonlinear pricing functional is applied that isolates and prices separately the two types of risk. It is represented solely in terms of risk aversion and the pricing measure, a martingale measure that preserves the conditional distribution of unhedged risks, given the hedgeable ones, from their historical counterparts.

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Authors and Affiliations

  1. BNP Paribas, 10 Harewood Avenue, NW1 6AA, London, UK

    Marek Musiela

  2. Departments of Mathematics and Management Science and Information Systems, The University of Texas at Austin, 78712, Austin, TX, USA

    Thaleia Zariphopoulou

Authors
  1. Marek Musiela
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  2. Thaleia Zariphopoulou
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Corresponding author

Correspondence to Marek Musiela.

Additional information

Received: 1 September 2003,

Mathematics Subject Classification:

93E20, 60G40, 60J75

JEL Classification:

C61, G11, G13

The second author acknowledges partial support from NSF Grants DMS 0102909 and DMS 0091946.

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Musiela, M., Zariphopoulou, T. A valuation algorithm for indifference prices in incomplete markets. Finance and Stochastics 8, 399–414 (2004). https://doi.org/10.1007/s00780-003-0117-0

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  • DOI: https://doi.org/10.1007/s00780-003-0117-0

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