Nonconvex optimization for pricing and hedging in imperfect markets
AbstractThe paper deals with imperfect financial markets and provides new methods to overcome many inefficiencies caused by frictions. Transaction costs are quite general and far from linear or convexo The concepts of pseudoarbitrage and efficiency are introduced and deeply analyzed by means of both scalar and vector optimization problems. Their optimality conditions and solutions yield strategies to invest and hedging portfolios, as well as bid-ask spread improvements. They also point out the role of coalitions when dealing with these markets. Several sensitivity results will permit us to show that a significant transaction costs reduction is very often feasible in practice, as well as to measure its effect on the general efficiency of the market. AII these findings may be especially important for many emerging and still illiquid spot or derivative markets (electricity markets, com odity markets, markets related to weather, infiation-linked or insurance-linked derivatives, etc.).
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/13024.
Length: 138 p.
Date of creation: Jul 2006
Date of revision:
Publication status: Published in Computers & Mathematics with Applications (2006-07) v.v. 52, p.121-136
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Web page: http://www.uc3m.es
Global optimization; Pseudoarbitrage; Spread reduction; Balance point;
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- repec:fth:inseep:9513 is not listed on IDEAS
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