Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

Alet Roux; Zhikang Xu

doi:10.1142/S0219024922500170

Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

Alet Roux, Zhikang Xu

Mathematics

Research output: Contribution to journal › Article › peer-review

Abstract

We consider indifference pricing of contingent claims consisting of payment flows in a
discrete time model with proportional transaction costs and under exponential disutility.
This setting covers utility maximisation of terminal wealth as a special case. A dual
representation is obtained for the associated disutility minimisation problem, together
with a dynamic procedure for solving it. This leads to efficient and convergent numerical
procedures for indifference pricing, optimal trading strategies and shadow prices that
apply to a wide range of payoffs, a large range of time steps and all magnitudes of
transaction costs.

Original language	English
Number of pages	41
Journal	International Journal of Theoretical and Applied Finance
Early online date	12 Jul 2022
DOIs	https://doi.org/10.1142/S0219024922500170
Publication status	E-pub ahead of print - 12 Jul 2022

Bibliographical note

This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

Access to Document

10.1142/S0219024922500170

2022-05-20-regret-paper-final-ITJAF
This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details
Accepted author manuscript, 490 KB

Cite this

@article{3e1f28dca6f449e29a08fd70359f1c51,

title = "Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs",

abstract = "We consider indifference pricing of contingent claims consisting of payment flows in adiscrete time model with proportional transaction costs and under exponential disutility.This setting covers utility maximisation of terminal wealth as a special case. A dualrepresentation is obtained for the associated disutility minimisation problem, togetherwith a dynamic procedure for solving it. This leads to efficient and convergent numericalprocedures for indifference pricing, optimal trading strategies and shadow prices thatapply to a wide range of payoffs, a large range of time steps and all magnitudes oftransaction costs.",

author = "Alet Roux and Zhikang Xu",

note = "This is an author-produced version of the published paper. Uploaded in accordance with the publisher{\textquoteright}s self-archiving policy. Further copying may not be permitted; contact the publisher for details ",

year = "2022",

month = jul,

day = "12",

doi = "10.1142/S0219024922500170",

language = "English",

journal = "International Journal of Theoretical and Applied Finance",

issn = "0219-0249",

publisher = "World Scientific Publishing",

}

TY - JOUR

T1 - Optimal investment and contingent claim valuation with exponential disutility under proportional transaction costs

AU - Roux, Alet

AU - Xu, Zhikang

N1 - This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

PY - 2022/7/12

Y1 - 2022/7/12

N2 - We consider indifference pricing of contingent claims consisting of payment flows in adiscrete time model with proportional transaction costs and under exponential disutility.This setting covers utility maximisation of terminal wealth as a special case. A dualrepresentation is obtained for the associated disutility minimisation problem, togetherwith a dynamic procedure for solving it. This leads to efficient and convergent numericalprocedures for indifference pricing, optimal trading strategies and shadow prices thatapply to a wide range of payoffs, a large range of time steps and all magnitudes oftransaction costs.

AB - We consider indifference pricing of contingent claims consisting of payment flows in adiscrete time model with proportional transaction costs and under exponential disutility.This setting covers utility maximisation of terminal wealth as a special case. A dualrepresentation is obtained for the associated disutility minimisation problem, togetherwith a dynamic procedure for solving it. This leads to efficient and convergent numericalprocedures for indifference pricing, optimal trading strategies and shadow prices thatapply to a wide range of payoffs, a large range of time steps and all magnitudes oftransaction costs.

U2 - 10.1142/S0219024922500170

DO - 10.1142/S0219024922500170

M3 - Article

SN - 0219-0249

JO - International Journal of Theoretical and Applied Finance

JF - International Journal of Theoretical and Applied Finance

ER -