Rational hedging and valuation of integrated risks under constant absolute risk aversion

By Dirk Becherer. 2003

137 citations recorded by the source corpus.

Abstract We study a rational valuation and hedging principle for contingent claims which integrate tradable and non-tradable sources of risk. The principle is based on the preferences of a rational investor with constant absolute risk aversion, and uses exponential utility-indifference arguments. Properties of this valuation and of a corresponding hedging strategy are analyzed in a general semi-martingale market framework. To obtain further constructive results and properties, a more specific class of semi-complete product models is studied in detail. This yields a computation scheme, simple valuation bounds, and results on diversification and information effects.

Subfields: Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/2301d3753f9363508676612fe81f99dd55ba8f87

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In Management Science and Operations Research

Citations in the corpus

Minimal Entropy Martingale Measure (2010, background): “This topic has first been studied in [4], [58], [59], [64]; later work has examined intertemporally dynamic extensions ([5], [51]), descriptions via BSDEs in specific models ([6], [51]), extensions to more general payoff structures ([38], [47], [48], [61]), etc.”
INDIFFERENCE PRICE WITH GENERAL SEMIMARTINGALES (2009, background): “Becherer’s paper [Be03] also consider only the exponential case and extend further the results in 1) and 2) above.”
Valuation and hedging of life insurance liabilities with systematic mortality risk (2006, methodology): “Schweizer (2001b) and Becherer (2003) and references therein.”
DYNAMIC INDIFFERENCE VALUATION VIA CONVEX RISK MEASURES (2007, background): “An early reference is Hodges and Neuberger (1989); Frittelli (2000) and Rouge and El Karoui (2000) are at the start of the recent resurgence of activity, and Becherer (2003) and Henderson and Hobson (2004) contain overviews and many more references.”
Inf-convolution of risk measures and optimal risk transfer (2005, background): “In this entropic case, this dilatation property has been referred to as volume scaling by Becherer (2003).”
Bounded solutions to backward SDE's with jumps for utility optimization and indifference hedging (2006, background): “5 in [2]) are satisfied, implying that Q̄ is the optimal measure Q and Z̄ = Z is its density process.”
OPTIMAL INVESTMENT WITH AN UNBOUNDED RANDOM ENDOWMENT AND UTILITY‐BASED PRICING (2007, methodology): “In the next result we analyze volume asymptotic properties of the average indifference price, generalizing results of Delbaen et al. (2002) and Becherer (2003) to any utility function satisfying Assumption 1.1.”
Utility–indifference hedging and valuation via reaction–diffusion systems (2004, background): “The next proposition is basically a reformulation of proposition 3.4 from Grandits & Rheinländer (2002); see Becherer (2001, 2003) for details.”