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https://hdl.handle.net/2440/70930
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Type: | Journal article |
Title: | Utility-based indifference pricing in regime-switching models |
Author: | Elliott, R. Siu, T. |
Citation: | Nonlinear Analysis Theory Methods and Applications, 2011; 74(17):6302-6313 |
Publisher: | Pergamon-Elsevier Science Ltd |
Issue Date: | 2011 |
ISSN: | 0362-546X 1873-5215 |
Statement of Responsibility: | Robert J. Elliott and Tak Kuen Siu |
Abstract: | In this paper, we study utility-based indifference pricing and hedging of a contingent claim in a continuous-time, Markov, regime-switching model. The market in this model is incomplete, so there is more than one price kernel. We specify the parametric form of price kernels so that both market risk and economic risk are taken into account. The pricing and hedging problem is formulated as a stochastic optimal control problem and is discussed using the dynamic programming approach. A verification theorem for the Hamilton-Jacobi-Bellman (HJB) solution to the problem is given. An issuer's price kernel is obtained from a solution of a system of linear programming problems and an optimal hedged portfolio is determined. © 2011 Elsevier Ltd. All rights reserved. |
Rights: | © 2011 Elsevier Ltd. All rights reserved |
DOI: | 10.1016/j.na.2011.06.009 |
Grant ID: | http://purl.org/au-research/grants/arc/DP0877639 |
Published version: | http://dx.doi.org/10.1016/j.na.2011.06.009 |
Appears in Collections: | Aurora harvest 5 Mathematical Sciences publications |
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