Abstract
In a market with stochastic interest rates, we consider an investor who can either (i) invest all of his wealth in a money market account or (ii) purchase zero-coupon bonds and invest the remainder of his wealth in the money market account. The indifference price of the zero-coupon bond is the price at which the investor could achieve the same expected utility under both strategies. In an affine term structure setting, we show that the indifference price of the zero-coupon bond is the root of an integral equation, when the investor's utility function is of exponential or power form. As an example, we compute the indifference price and the corresponding indifference yield curve in the Vasicek model and conduct sensitivity analysis to study the impact of various parameters on the yield curve. Furthermore, we discuss the choice of numéraire and its impact on the indifference prices.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
