Dynamic exponential utility indifference valuation

Abstract

We study the dynamics of the exponential utility indifference value process C(B; α) for a contingent claim B in a semimartingale model with a general continuous filtration. We prove that C(B; α) is (the first component of) the unique solution of a backward stochastic differential equation with a quadratic generator and obtain BMO estimates for the components of this solution. This allows us to prove several new results about C_t(B; α). We obtain continuity in B and local Lipschitz-continuity in the risk aversion α, uniformly in t, and we extend earlier results on the asymptotic behavior as α↘0 or α↗∞ to our general setting. Moreover, we also prove convergence of the corresponding hedging strategies.