Advanced Search
MyIDEAS: Login to save this paper or follow this series

Superreplication when trading at market indifference prices

Contents:

Author Info

  • Peter Bank
  • Selim G\"okay
Registered author(s):

    Abstract

    We study superreplication of European contingent claims in discrete time in a large trader model with market indifference prices recently proposed by Bank and Kramkov. We introduce a suitable notion of efficient friction in this framework, adopting a terminology introduced by Kabanov, Rasonyi, and Stricker in the context of models with proportional transaction costs. In our framework, efficient friction ensures that large positions of the investor may lead to large losses, a fact from which we derive the existence of superreplicating strategies. We illustrate that without this condition there may be no superreplicating strategy with minimal costs. In our main result, we establish efficient friction under a tail condition on the conditional distributions of the traded securities and under an asymptotic criterion on risk aversions of the market makers. Another result asserts that strict monotonicity of the conditional essential infima and suprema of the security prices is sufficient for efficient friction. We give examples that satisfy the assumptions in our conditions, which include non-degenerate finite sample space models as well as Levy processes and an affine stochastic volatility model of Barndorff-Nielsen-Shepard type.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://arxiv.org/pdf/1310.3113
    File Function: Latest version
    Download Restriction: no

    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1310.3113.

    as in new window
    Length:
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:arx:papers:1310.3113

    Contact details of provider:
    Web page: http://arxiv.org/

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Luciano Campi & Walter Schachermayer, 2006. "A super-replication theorem in Kabanov’s model of transaction costs," Finance and Stochastics, Springer, vol. 10(4), pages 579-596, December.
    2. Broadie, Mark & Cvitanic, Jaksa & Soner, H Mete, 1998. "Optimal Replication of Contingent Claims under Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 59-79.
    3. Jouini, Elyès & Kallal, Hedi, 1995. "Arbitrage in securities markets with short-sales constraints," Economics Papers from University Paris Dauphine 123456789/5647, Paris Dauphine University.
    4. Paolo Guasoni & Mikl\'os R\'asonyi & Walter Schachermayer, 2008. "Consistent price systems and face-lifting pricing under transaction costs," Papers 0803.4416, arXiv.org.
    5. Dylan Possamai & Nizar Touzi & H. Mete Soner, 2012. "Large liquidity expansion of super-hedging costs," Papers 1208.3785, arXiv.org.
    6. (**), Christophe Stricker & (*), Miklós Rásonyi & Yuri Kabanov, 2002. "No-arbitrage criteria for financial markets with efficient friction," Finance and Stochastics, Springer, vol. 6(3), pages 371-382.
    7. Elyégs Jouini & Hédi Kallal, 1995. "Arbitrage In Securities Markets With Short-Sales Constraints," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 197-232.
    8. Umut Çetin & H. Soner & Nizar Touzi, 2010. "Option hedging for small investors under liquidity costs," Finance and Stochastics, Springer, vol. 14(3), pages 317-341, September.
    9. H. Mete Soner & Umut Cetin & Nizar Touzi, 2010. "Option hedging for small investors under liquidity costs," LSE Research Online Documents on Economics 28992, London School of Economics and Political Science, LSE Library.
    10. Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
    11. Elisa Nicolato & Emmanouil Venardos, 2003. "Option Pricing in Stochastic Volatility Models of the Ornstein-Uhlenbeck type," Mathematical Finance, Wiley Blackwell, vol. 13(4), pages 445-466.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:arx:papers:1310.3113. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.