Accounting for risk aversion in derivatives purchase timing

作者：Leung Tim; Ludkovski Mike^*

来源：Mathematics and Financial Economics, 2012, 6(4): 363-386.

DOI：10.1007/s11579-012-0063-8

• Sequential purchase timing
• Indifference pricing
• Risk aversion
• Stochastic control with optimal stopping

We study the problem of optimal timing to buy/sell derivatives by a risk-averse agent in incomplete markets. Adopting the exponential utility indifference valuation, we investigate this timing flexibility and the associated delayed purchase premium. This leads to a stochastic control and optimal stopping problem that combines the observed market price dynamics and the agent's risk preferences. Our results extend recent work on indifference valuation of American options, as well as the authors' first paper (Leung and Ludkovski, SIAM J Finan Math 2(1) 768-793, 2011). In the case of Markovian models of contracts on non-traded assets, we provide analytical characterizations and numerical studies of the optimal purchase strategies, with applications to both equity and credit derivatives.

• 出版日期2012-8