Risk-indifference Pricing of American-style Contingent Claims

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.