Prospect Theory, Indifference Curves, and Hedging Risks

Indifference Pricing and Hedging of Defaultable Claims

Utility-Indifference Hedging and Valuation via Reaction-Diffusion Systems

This article studies the exponential utility-indifference approach to the valuation and hedging problem in incomplete markets. We consider a financial model which is driven by a system of interacting Itô and point processes. The model allows for a variety of mutual stochastic dependencies between the tradable and non-tradable factors of risk, but still permits for a constructive and fairly expl...

Indifference pricing and hedging in stochastic volatility models

We apply the concepts of utility based pricing and hedging of derivatives in stochastic volatility markets and introduce a new class of “reciprocal affine” models for which the indifference price and optimal hedge portfolio for pure volatility claims are efficiently computable. We obtain a general formula for the market price of volatility risk in these models and calculate it explicitly for th...

Some covariance inequalities for non-monotonic functions with applications to mean-variance indifference curves and bank hedging

Habit , Long Run Risks , Prospect ?

We use Bayesian statistical methods to compare the habit persistence asset pricing model of Campbell and Cochrane, the long run risks model of Bansal and Yaron, and the prospect theory model of Barberis, Huang, and Santos. We undertake two types of comparisons, relative and absolute, over two sample periods, 1930–2008 and 1950–2008, using two series, univariate U.S. stock returns and bivariate ...