Year: 2005
Type: article
Abstract: We study the dynamics of the exponential utility indifference value process C(B; α) for a contingent claim B in a semimartingale model with a general continuous filtration. We prove that C(B; α) is (the first component of) the unique solution of a backward stochastic differential equation with a quadratic generator and obtain BMO estimates for the components of this solution. This allows us to prove several new results about Ct(B; α). We obtain continuity in B and local Lipschitz-continuity in the risk aversion α, uniformly in t, and we extend earlier results on the asymptotic behavior as α↘0 or α↗∞ to our general setting. Moreover, we also prove convergence of the corresponding hedging strategies.
Authors: Michael Mania, Martin Schweizer
Institution: ETH Zurich
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2075642249