A model for a large investor trading at market indifference prices. I: single-period case

TL;DR

This paper introduces a single-period model for a large investor trading at market indifference prices, emphasizing the role of conjugate saddle functions in describing Pareto optimal allocations.

Contribution

It develops a novel single-period framework linking utility indifference prices with Pareto optimality using conjugate saddle functions.

Findings

Characterizes Pareto optimal allocations via conjugate saddle functions.

Establishes a model for large investors trading at market indifference prices.

Abstract

We develop a single-period model for a large economic agent who trades with market makers at their utility indifference prices. A key role is played by a pair of conjugate saddle functions associated with the description of Pareto optimal allocations in terms of the utility function of a representative market maker.