2020/07/17 by Matthew Lorig, Lorig, Matthew
Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Markets and Investment Strategies #Stochastic processes and financial applications #q-fin.CP
paper · pdf · doi:10.48550/arxiv.2007.09201
11 pages, 2 figures
arxiv created 2020/07/17 · openalex publication_date 2020/07/17 · arxiv updated 2020/07/21 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
In a market with stochastic interest rates, we consider an investor who can either (i) invest all if his money in a savings account or (ii) purchase zero-coupon bonds and invest the remainder of his wealth in a savings account. The indifference price of the bond is the price for which the investor could achieve the same expected utility under both scenarios. In an affine term structure setting, under the assumption that an investor has a utility function in either exponential or power form, we show that the indifference price of a zero-coupon bond is the root of an integral expression. As an example, we compute bond indifference prices and the corresponding indifference yield curves in the Vasicek setting and interpret the results.