Utility-Based Pricing in the Large Position, Nearly Complete Limit

Utility-Based Pricing in the Large Position, Nearly Complete Limit

Fri, 01/06/2012
14:15 		Prof Scott Robertosn (Pittsburgh) Nomura Seminar Add to calendar DH 1st floor SR
Utility-Based Pricing in the Large Position, Nearly Complete Limit
In this talk, approximations to utility indifference prices for a contingent claim in the large position size limit are provided. Results are valid for general utility functions and semi-martingale models. It is shown that as the position size approaches infinity, all utility functions with the same rate of decay for large negative wealths yield the same price. Practically, this means an investor should price like an exponential investor. In a sizeable class of diffusion models, the large position limit is seen to arise naturally in conjunction with the limit of a complete model and hence approximations are most appropriate in this setting.