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A model for a large investor trading at market indifference prices. I: single-period case

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  • Peter Bank

    (Technische Universit\"at Berlin)

  • Dmitry Kramkov

    (Carnegie Mellon and Oxford)

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    Abstract

    We develop a single-period model for a large economic agent who trades with market makers at their utility indifference prices. A key role is played by a pair of conjugate saddle functions associated with the description of Pareto optimal allocations in terms of the utility function of a representative market maker.

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    File URL: http://arxiv.org/pdf/1110.3224
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1110.3224.

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    Date of creation: Oct 2011
    Date of revision: Dec 2013
    Handle: RePEc:arx:papers:1110.3224

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    1. Peter Bank & Dietmar Baum, 2004. "Hedging and Portfolio Optimization in Financial Markets with a Large Trader," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 1-18.
    2. E. Platen & M. Schweizer, 1997. "On Feedback Effects from Hedging Derivatives," SFB 373 Discussion Papers 1997,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
    4. U. �etin & R. Jarrow & P. Protter & M. Warachka, 2006. "Pricing Options in an Extended Black Scholes Economy with Illiquidity: Theory and Empirical Evidence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(2), pages 493-529.
    5. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    6. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 33(4), pages 1133-51, September.
    7. Alexander Schied & Torsten Schöneborn, 2009. "Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets," Finance and Stochastics, Springer, Springer, vol. 13(2), pages 181-204, April.
    8. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. repec:wop:humbsf:1997-83 is not listed on IDEAS
    10. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, Econometric Society, vol. 70(2), pages 583-601, March.
    11. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers, Princeton, Department of Economics - Financial Research Center 88, Princeton, Department of Economics - Financial Research Center.
    12. Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, Springer, vol. 8(3), pages 311-341, 08.
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