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General indifference pricing with small transaction costs

Author

Listed:
  • Dylan Possamai
  • Guillaume Royer
Abstract
We study the utility indifference price of a European option in the context of small transaction costs. Considering the general setup allowing consumption and a general utility function at final time T, we obtain an asymptotic expansion of the utility indifference price as a function of the asymptotic expansions of the utility maximization problems with and without the European contingent claim. We use the tools developed in [54] and [48] based on homogenization and viscosity solutions to characterize these expansions. Finally we study more precisely the example of exponential utilities, in particular recovering under weaker assumptions the results of [6].

Suggested Citation

  • Dylan Possamai & Guillaume Royer, 2014. "General indifference pricing with small transaction costs," Papers 1401.3261, arXiv.org, revised Apr 2015.
    • Handle: RePEc:arx:papers:1401.3261
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    References listed on IDEAS

    as
    1. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
    2. Luciano Campi & Walter Schachermayer, 2006. "A super-replication theorem in Kabanov’s model of transaction costs," Finance and Stochastics, Springer, vol. 10(4), pages 579-596, December.
    3. Dylan Possamai & H. Mete Soner & Nizar Touzi, 2012. "Homogenization and asymptotics for small transaction costs: the multidimensional case," Papers 1212.6275, arXiv.org, revised Jan 2013.
    4. Jan Kallsen & Johannes Muhle-Karbe, 2013. "The General Structure of Optimal Investment and Consumption with Small Transaction Costs," Swiss Finance Institute Research Paper Series 13-15, Swiss Finance Institute.
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    7. Bruno Bouchard & Ludovic Moreau & Mete H. Soner, 2013. "Hedging under an expected loss constraint with small transaction costs," Papers 1309.4916, arXiv.org, revised Sep 2014.
    8. Jan Kallsen & Johannes Muhle-Karbe, 2012. "Option Pricing and Hedging with Small Transaction Costs," Swiss Finance Institute Research Paper Series 12-30, Swiss Finance Institute.
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    Cited by:

    1. Ludovic Moreau & Johannes Muhle-Karbe & H. Mete Soner, 2014. "Trading with Small Price Impact," Papers 1402.5304, arXiv.org, revised Mar 2015.

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