Valuation of Claims on NonTraded Assets using Utility Maximization

Henderson, Vicky

doi:10.1111/1467-9965.12405

Cited by 117 publications

(166 citation statements)

References 18 publications

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“…For example, C T can be a functional of the output process X, such as an option written on that process. However, it cannot depend on the hedging asset S. We recall now a result by Henderson (2002) and extended by Tehranchi …”

Section: Performance Based Contracts In a Two-factor Modelmentioning

confidence: 82%

On managerial risk-taking incentives when compensation may be hedged against

2014

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We consider a continuous time principal-agent model where the principal/firm compensates an agent/manager who controls the output's exposure to risk and its expected return.Both the firm and the manager have exponential utility and can trade in a frictionless market. When the firm observes the manager's choice of effort and volatility, there is an optimal contract that induces the manager to not hedge. In a two factor specification of the model where an index and a bond are traded, the optimal contract is linear in output and the log return of the index. We also consider a manager who receives exogenous share or option compensation and illustrate how risk taking depends on the relative size of the systematic and firm-specific risk premia of the output and index. Whilst in most cases, options induce greater risk taking than shares, we find that there are also situations under which the hedging manager may take less risk than the non-hedging manager.

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Section: Performance Based Contracts In a Two-factor Modelmentioning

confidence: 82%

On managerial risk-taking incentives when compensation may be hedged against

2014

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“…This approach has been used extensively in the literature, for example by Svensson and Werner (1993), Henderson (2002Henderson ( , 2005 and Pelsser (2005). These papers study a situation where a new derivative is added to the existing portfolio of an investment bank or a new product is added to the portfolio of an insurer, and part of the risk on the new derivative or product cannot be hedged using market instruments.…”

Section: Utility-based Pricingmentioning

confidence: 99%

“…The unhedgeable risk therefore does not influence the marginal utility of the hedgeable wealth component (separability). This will be different for the models of Henderson (2002Henderson ( , 2005 and Pelsser (2005), where the utility function is CARA and the risk is additive and therefore does impact the marginal utility of hedgeable wealth.…”

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confidence: 99%

Valuation of Pension Liabilities in Incomplete Markets

Jong

2007

SSRN Journal

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“…The well known one dimensional non-traded assets model is an exception and in a Markovian framework with a derivative written on a single non-traded asset, and partial hedging in a financial asset, Henderson and Hobson [22], Henderson [20], and Musiela and Zariphopoulou [40] used the Cole-Hopf transformation (or distortion power ) to linearize the non-linear PDE for the value function. This trick results in an explicit formula for the exponential utility indifference price.…”

Section: Introductionmentioning

confidence: 99%

A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

Henderson

Liang

2011

SSRN Journal

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This paper considers exponential utility indifference pricing for a multidimensional nontraded assets model subject to inter-temporal default risk, and provides a semigroup approximation for the utility indifference price. The key tool is the splitting method, whose convergence is proved based on the Barles-Souganidis monotone scheme, and the convergence rate is derived based on Krylov's shaking the coefficients technique. We apply our methodology to study the counterparty risk of derivatives in incomplete markets.

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Valuation of Claims on NonTraded Assets using Utility Maximization

Cited by 117 publications

References 18 publications

On managerial risk-taking incentives when compensation may be hedged against

On managerial risk-taking incentives when compensation may be hedged against

Valuation of Pension Liabilities in Incomplete Markets

A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

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