Indifference prices and implied volatilities
Mathematical Finance
2015-09-04 v2
Abstract
We consider a general local-stochastic volatility model and an investor with exponential utility. For a European-style contingent claim, whose payoff may depend on either a traded or non-traded asset, we derive an explicit approximation for both the buyer's and seller's indifference price. For European calls on a traded asset, we translate indifference prices into an explicit approximation of the buyer's and seller's implied volatility surface. For European claims on a non-traded asset, we establish rigorous error bounds for the indifference price approximation. Finally, we implement our indifference price and implied volatility approximations in two examples.
Keywords
Cite
@article{arxiv.1412.5520,
title = {Indifference prices and implied volatilities},
author = {Matthew Lorig},
journal= {arXiv preprint arXiv:1412.5520},
year = {2015}
}
Comments
345 pages, 4 figures