Utility indifference pricing in the Heston model: pricing, hedging and shortcomings

@inproceedings{10429,
   author = {Sohns, Moritz},
   address = {Praha},
   booktitle = {Konference doktorandů na Vysoké škole finanční a správní 2022: prezentace výsledků společenskovědního výzkumu s ekonomickými a finančními efekty (9. ročník) = Doctoral Students Conference at the University of Finance and Administration 2022: presentation of the results of social science research with economic and financial effects (9th annual conference)},
   editor = {ROUBAL, Ondřej, ed.},
   keywords = {Heston model; stochastic volatility; derivatives pricing; option pricing; pricing simulation},
   howpublished = {tištěná verze "print"},
   language = {eng},
   location = {Praha},
   isbn = {978-80-7408-250-4},
   pages = {132-145},
   publisher = {Vysoká škola finanční a správní},
   title = {Utility indifference pricing in the Heston model: pricing, hedging and shortcomings},
   url = {https://www.vsfs.cz/prilohy/konference_doktorandu_na_vysoke_skole_fi.pdf},
   year = {2022}
}

TY  - JOUR
ID  - 10429
AU  - Sohns, Moritz
PY  - 2022
TI  - Utility indifference pricing in the Heston model: pricing, hedging and shortcomings
PB  - Vysoká škola finanční a správní
CY  - Praha
SN  - 9788074082504
KW  - Heston model
KW  - stochastic volatility
KW  - derivatives pricing
KW  - option pricing
KW  - pricing simulation
UR  - https://www.vsfs.cz/prilohy/konference_doktorandu_na_vysoke_skole_fi.pdf
N2  - This paper deals with the Heston model's utility indifference pricing method via the exponential utility function. We illustrate the main properties, review the existing literature and elaborate on the idea behind the pricing method and control. The main results of this paper are a pricing equation for the model, an equation for the optimal hedging strategy in the model, an illustration of why short positions must not appear in practice when applying the utility indifference approach, which is a contradiction to the observed real-world trading and a simulation of the price process, calculation of the corresponding derivative prices and a comparison of the different hedging strategies. The simulation together with the result about the absence of short positions hints that utility indifference pricing should be treated with caution when applied in practice in the real world.
ER  - 

SOHNS, Moritz. Utility indifference pricing in the Heston model: pricing, hedging and shortcomings. In ROUBAL, Ondřej, ed. \textit{Konference doktorandů na Vysoké škole finanční a správní 2022: prezentace výsledků společenskovědního výzkumu s ekonomickými a finančními efekty (9. ročník) = Doctoral Students Conference at the University of Finance and Administration 2022: presentation of the results of social science research with economic and financial effects (9th annual conference)}. Praha: Vysoká škola finanční a správní, 2022, s.~132-145. ISBN~978-80-7408-250-4.