Zero-level pricing and the HARA utility functions

S. M. Guu, J. N. Wang

Research output: Contribution to journalJournal Article peer-review

2 Scopus citations

Abstract

In the mathematical economics literature, the zero-level pricing method has been proposed to provide a unique price for a nonmarketable new asset. From the viewpoint of robust pricing theory, its disadvantage is that the method depends on the investor utility function and initial wealth. In some situations, the zero-level price is universal, namely, independent of the utility function and initial wealth. We show that only one parameter of the HARA (hyperbolic absolute risk aversion) utility function affects the zero-level price of a new asset. This implies that, if this parameter is fixed, the zero-level price is identical for all individuals with HARA utility functions and different levels of initial wealth.

Original languageEnglish
Pages (from-to)393-402
Number of pages10
JournalJournal of Optimization Theory and Applications
Volume139
Issue number2
DOIs
StatePublished - 11 2008
Externally publishedYes

Keywords

  • Asset pricing
  • Hyperbolic absolute risk aversion utility
  • Maximization
  • Zero-level pricing

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