English

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

R2 v1 2026-06-22T07:35:29.476Z