American Institute of Mathematical Sciences

January  2018, 14(1): 199-229. doi: 10.3934/jimo.2017043

Neutral and indifference pricing with stochastic correlation and volatility

 Department of Mathematics, Sichuan University, Chengdu, Sichuan 610064, China

* Corresponding author: Nan-jing Huang

Received  January 2016 Revised  February 2017 Published  April 2017

Fund Project: This work was supported by the National Natural Science Foundation of China (11471230,11671282).

In this paper, we consider a Wishart Affine Stochastic Correlation (WASC) model which accounts for the stochastic volatilities of the assets and for the stochastic correlations not only between the underlying assets' returns but also between their volatilities. Under the assumptions of the model, we derive the neutral and indifference pricing for general European-style financial contracts. The paper shows that comparing to risk-neutral pricing, the utility-based pricing methods are generally feasible and avoid factitiously dealing with some risk premia corresponding to the volatilities-correlations as a consequence of the incompleteness of the market.

Citation: Jia Yue, Nan-Jing Huang. Neutral and indifference pricing with stochastic correlation and volatility. Journal of Industrial & Management Optimization, 2018, 14 (1) : 199-229. doi: 10.3934/jimo.2017043
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Solutions to $F_\gamma$ and F (n = 2)
Solutions to $F_\gamma$ and F (n = 1)
Price under different delivery times and positions($\gamma = 0.5$)
Price under different delivery times and positions($\gamma = 2$)
Price under different risk-aversion parameters($\kappa_0 = -5,T = 1,\gamma\neq 1$)
Price under different risk-aversion parameters($\kappa_0 = 5,T = 1,\gamma\neq 1$)
Price under different risk-aversion parameters($\kappa_0 = -0.01,T = 1,\gamma\neq 1$)
Price under different risk-aversion parameters($\kappa_0 = 0,T = 1,\gamma\neq 1$)
Price under different risk-aversion parameters and positions($T = 1$)
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