Utility Based Pricing in the Large Claim, Nearly Complete Limit

Details Utility Based Pricing in the Large Claim, Nearly Complete Limit Utility Based Pricing in the Large Claim, Nearly Complete Limit

2012-02-17

arxiv.org/abs/1202.4007v1

Economy

Quantitative Finance

Pricing of Securities

36 pages

Scientific paper

This paper provides approximations to utility indifference prices for a contingent claim in the large position size limit. 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.

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