# Indifference valuation in incomplete binomial models

M. Musiela^{[1]}; E. Sokolova^{[2]}; T. Zariphopoulou^{[3]}

- [1] BNP Paribas London
- [2] Barclays Capital
- [3] The Oxford-Man Institute and Mathematical Institute, University of Oxford; and Departments of Mathematics and IROM, The University of Texas in Austin

MathematicS In Action (2010)

- Volume: 3, Issue: 2, page 1-36
- ISSN: 2102-5754

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topMusiela, M., Sokolova, E., and Zariphopoulou, T.. "Indifference valuation in incomplete binomial models." MathematicS In Action 3.2 (2010): 1-36. <http://eudml.org/doc/116436>.

@article{Musiela2010,

abstract = {The indifference valuation problem in incomplete binomial models is analyzed. The model is more general than the ones studied so far, because the stochastic factor, which generates the market incompleteness, may affect the transition propabilities and/or the values of the traded asset as well as the claim’s payoff. Two pricing algorithms are constructed which use, respectively, the minimal martingale and the minimal entropy measures. We study in detail the interplay among the different kinds of market incompleteness, the pricing measures and the price functionals. The dependence of the prices on the choice of the trading horizon is discussed. The family of “almost complete” (reduced) binomial models is also studied. It is shown that the two measures and the associated price functionals coincide, and that the effects of the horizon choice dissipate.},

affiliation = {BNP Paribas London; Barclays Capital; The Oxford-Man Institute and Mathematical Institute, University of Oxford; and Departments of Mathematics and IROM, The University of Texas in Austin},

author = {Musiela, M., Sokolova, E., Zariphopoulou, T.},

journal = {MathematicS In Action},

keywords = {indifference pricing; incomplete markets; utility function; minimal martingale measure; minimal entropy measure; binomial model},

language = {eng},

number = {2},

pages = {1-36},

publisher = {Société de Mathématiques Appliquées et Industrielles},

title = {Indifference valuation in incomplete binomial models},

url = {http://eudml.org/doc/116436},

volume = {3},

year = {2010},

}

TY - JOUR

AU - Musiela, M.

AU - Sokolova, E.

AU - Zariphopoulou, T.

TI - Indifference valuation in incomplete binomial models

JO - MathematicS In Action

PY - 2010

PB - Société de Mathématiques Appliquées et Industrielles

VL - 3

IS - 2

SP - 1

EP - 36

AB - The indifference valuation problem in incomplete binomial models is analyzed. The model is more general than the ones studied so far, because the stochastic factor, which generates the market incompleteness, may affect the transition propabilities and/or the values of the traded asset as well as the claim’s payoff. Two pricing algorithms are constructed which use, respectively, the minimal martingale and the minimal entropy measures. We study in detail the interplay among the different kinds of market incompleteness, the pricing measures and the price functionals. The dependence of the prices on the choice of the trading horizon is discussed. The family of “almost complete” (reduced) binomial models is also studied. It is shown that the two measures and the associated price functionals coincide, and that the effects of the horizon choice dissipate.

LA - eng

KW - indifference pricing; incomplete markets; utility function; minimal martingale measure; minimal entropy measure; binomial model

UR - http://eudml.org/doc/116436

ER -

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