Duality and Convergence for Binomial Markets with Friction
AbstractWe prove limit theorems for the super-replication cost of European options in a Binomial model with friction. The examples covered are markets with proportional transaction costs and the illiquid markets. The dual representation for the super-replication cost in these models are obtained and used to prove the limit theorems. In particular, the existence of the liquidity premium for the continuous time limit of the model proposed in  is proved. Hence, this paper extends the previous convergence result of  to the general non-Markovian case. Moreover, the special case of small transaction costs yields, in the continuous limit, the $G$-expectation of Peng as earlier proved by Kusuoka in .
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1106.2095.
Date of creation: Jun 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-18 (All new papers)
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- Umut Çetin & L. C. G. Rogers, 2007. "Modeling Liquidity Effects In Discrete Time," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 15-29.
- Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
- Christian Bayer & Bezirgen Veliyev, 2012. "Utility Maximization in a Binomial Model with transaction costs: a Duality Approach Based on the Shadow Price Process," Papers 1209.5175, arXiv.org.
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