Pseudo Linear Pricing Rule for Utility Indifference Valuation

TL;DR

This paper introduces a pseudo linear pricing rule for utility indifference valuation in multidimensional non-traded assets, offering linear approximations and alternative derivations to improve pricing methods.

Contribution

It presents a novel pseudo linear pricing rule and provides linear approximations for utility indifference prices in complex asset models.

Findings

Develops a probabilistic representation for utility indifference prices.

Provides two linear approximation methods for pricing.

Derives an alternative quadratic BSDE representation.

Abstract

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model, and provides two linear approximations for the utility indifference price. The key tool is a probabilistic representation for the utility indifference price by the solution of a functional differential equation, which is termed \emph{pseudo linear pricing rule}. We also provide an alternative derivation of the quadratic BSDE representation for the utility indifference price.