Risk-averse asymptotics for reservation prices

TL;DR

This paper investigates how, as an investor's risk aversion increases indefinitely, their utility-based reservation prices for financial claims approach the super replication price, under broad conditions.

Contribution

It establishes general conditions under which utility indifference prices converge to the super replication price as risk aversion tends to infinity.

Findings

Utility indifference prices converge to super replication price with increasing risk aversion.

Provides a general framework applicable to various market models.

Bridges the gap between utility-based pricing and super replication in high risk aversion limit.

Abstract

An investor's risk aversion is assumed to tend to infinity. In a fairly general setting, we present conditions ensuring that the respective utility indifference prices of a given contingent claim converge to its super replication price.