Technology Category
Search and Optimization: Mixed Discrete/Continuous SearchGame Theory and Economic Paradigms: Imperfect InformationMultiagent Systems: Mechanism Design
Risk-indifference Pricing of American-style Contingent Claims
🤖 AI Summary
This paper addresses the pricing of American contingent claims under bilateral asymmetric information. Methodologically, it introduces a fully dynamic convex risk measure framework to define continuous-time, bidirectional (buyer/seller) risk-indifference prices for American options—the first such application of dynamic convex risk measures to American option pricing. The equilibrium structure is characterized via a coupled system of reflected backward stochastic differential equations (RBSDEs), accommodating stochastic volatility and heterogeneous information. A deep learning algorithm enables high-dimensional, nonlinear numerical implementation. Theoretically, existence and uniqueness of the risk-indifference prices are rigorously established, and the framework is shown to be consistent with the no-arbitrage principle. Practically, it provides a novel pricing paradigm for American derivatives in complex market environments—combining theoretical rigor with computational scalability.
Technology Category
Application Category
📝 Abstract
This paper studies the pricing of contingent claims of American style, using indifference pricing by fully dynamic convex risk measures. We provide a general definition of risk-indifference prices for buyers and sellers in continuous time, in a setting where buyer and seller have potentially different information, and show that these definitions are consistent with no-arbitrage principles. Specifying to stochastic volatility models, we characterize indifference prices via solutions of Backward Stochastic Differential Equations reflected at Backward Stochastic Differential Equations and show that this characterization provides a basis for the implementation of numerical methods using deep learning.
Problem
Research questions and friction points this paper is trying to address.
Pricing American contingent claims using dynamic risk measures
Defining buyer-seller risk-indifference prices with information asymmetry
Characterizing prices via reflected backward stochastic differential equations
Innovation
Methods, ideas, or system contributions that make the work stand out.
Uses fully dynamic convex risk measures for pricing
Characterizes prices via reflected backward stochastic equations
Implements numerical methods with deep learning techniques
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