Bounded solutions to backward SDE's with jumps for utility optimization and indifference hedging

Details Bounded solutions to backward SDE's with jumps for utility optimization and indifference hedging Bounded solutions to backward SDE's with jumps for utility optimization and indifference hedging

2007-02-14

arxiv.org/abs/math/0702405v1

Annals of Applied Probability 2006, Vol. 16, No. 4, 2027-2054

Mathematics

Probability

Published at http://dx.doi.org/10.1214/105051606000000475 in the Annals of Applied Probability (http://www.imstat.org/aap/) by

Scientific paper

10.1214/105051606000000475

We prove results on bounded solutions to backward stochastic equations driven by random measures. Those bounded BSDE solutions are then applied to solve different stochastic optimization problems with exponential utility in models where the underlying filtration is noncontinuous. This includes results on portfolio optimization under an additional liability and on dynamic utility indifference valuation and partial hedging in incomplete financial markets which are exposed to risk from unpredictable events. In particular, we characterize the limiting behavior of the utility indifference hedging strategy and of the indifference value process for vanishing risk aversion.

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