RISK INDIFFERENCE PRICING IN JUMP DIFFUSION MARKETS

Bernt Øksendal · Agnès Sulem

38 citations0/0 files storedMathematical Finance

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Stochastic processes and financial applications Economic theories and models Risk and Portfolio Optimization

Abstract

We study the risk indifference pricing principle in incomplete markets: The (seller's) risk indifference price is the initial payment that makes the risk involved for the seller of a contract equal to the risk involved if the contract is not sold, with no initial payment. We use stochastic control theory and PDE methods to find a formula for and similarly for . In particular, we prove that image where plow and pup are the lower and upper hedging prices, respectively.

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References

1999Coherent Measures of Risk 2004Lévy Processes and Stochastic Calculus 2002Convex measures of risk and trading constraints 2002Coherent Risk Measures on General Probability Spaces 2002Putting order in risk measures 1989Optimal replication of contingent claims under transaction costs 2007Applied Stochastic Control of Jump Diffusions 1996Optional decomposition of supermartingales and hedging contingent claims in incomplete security markets

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2012On Zero-Sum Stochastic Differential Games with Jump-Diffusion Driven State: A Viscosity Solution Framework

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