Bounded solutions to backward SDE's with jumps for utility optimization and indifference hedging

Abstract

We prove results on bounded solutions to backward stochastic equations driven by random measures. Those bounded BSDE solutions are then applied to solve different stochastic optimization problems with exponential utility in models where the underlying filtration is noncontinuous. This includes results on portfolio optimization under an additional liability and on dynamic utility indifference valuation and partial hedging in incomplete financial markets which are exposed to risk from unpredictable events. In particular, we characterize the limiting behavior of the utility indifference hedging strategy and of the indifference value process for vanishing risk aversion.

Published at http://dx.doi.org/10.1214/105051606000000475 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)

References in corpus (4)

• Utility maximization in incomplete markets
• Dynamic exponential utility indifference valuation
• Number of paths versus number of basis functions in American option pricing
• Classical solutions to reaction-diffusion systems for hedging problems with interacting Ito and point processes

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