arXiv:math/0404447 Abstract

arXiv:math/0404447 [math.PR]Abstract References Reviews Resources

Indifference pricing and hedging in stochastic volatility models

Published 2004-04-24Version 1

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 the case of an exponential utility.

Categories: math.PR, math.OC, q-fin.PR

Subjects: 49L20, 91B16, 91B28

Keywords: stochastic volatility models, indifference pricing, stochastic volatility markets, optimal hedge portfolio, pure volatility claims

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