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Hedging with Liquidity Risk under CEV Diffusion

Author

Listed:
  • Sang-Hyeon Park

    (Asset Management Department, Daishin Securities, Seoul 06131, Korea
    These authors contributed equally to this work.)

  • Kiseop Lee

    (Department of Statistics, Purdue University, West Lafayette, IN 47907, USA
    These authors contributed equally to this work.)

Abstract

We study a discrete time hedging and pricing problem in a market with the liquidity risk. We consider a discrete version of the constant elasticity of variance (CEV) model by applying Leland’s discrete time replication scheme. The pricing equation becomes a nonlinear partial differential equation, and we solve it by a multi scale perturbation method. A numerical example is provided.

Suggested Citation

  • Sang-Hyeon Park & Kiseop Lee, 2020. "Hedging with Liquidity Risk under CEV Diffusion," Risks, MDPI, vol. 8(2), pages 1-12, June.
    • Handle: RePEc:gam:jrisks:v:8:y:2020:i:2:p:62-:d:367569
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    References listed on IDEAS

    as
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