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UTILITY INDIFFERENCE PRICING AND MEAN-VARIANCE APPROACH WHEN THE DEGREE OF RISK AVERSION IS SMALL
Keywords:
utility indifference pricing, mean-variance approach, degree of risk aversion, Taylor series approximationDOI:
https://doi.org/10.17654/0972086322016Abstract
We study the properties of the risk-sensitive value measure and mean-variance approach studied by Hodoshima et al. [2] when the degree of risk aversion is small. We show that the two value measures work similarly in normal mixture distributions as well as any distribution when the degree of risk aversion is small. Therefore, the advantage of the risk-sensitive value measure disappears compared to mean- variance approach in any distribution when the degree of risk aversion is small. We obtain the result by approximating the risk-sensitive value measure by Taylor series expansion.
Received: September 6, 2022
Accepted: October 13, 2022
References
R. Aumann and R. Serrano, An economic index of riskiness, Journal of Political Economy 116 (2008), 810-836.
J. Hodoshima, T. Misawa and Y. Miyahara, Comparison of utility indifference pricing and mean-variance approach under normal mixture, Finance Research Letters 24 (2018), 221-229.
J. Hodoshima and Y. Miyahara, Utility indifference pricing and the Aumann-Serrano performance index, J. Math. Econom. 86 (2020), 83-89.
Y. Miyahara, Risk-sensitive value measure method for projects evaluation, Journal of Real Options and Strategy 3 (2010), 185-204.
Y. Miyahara, Evaluation of the scale risk, RIMS Kokyuroku, No. 1886, Financial Modeling and Analysis (2013/11/20-2013/11/22) (2014), 181-188.
Y. Miyahara, Personal communication, 2021.
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