Hedging through a Limit Order Book with Varying Liquidity
AbstractWe relax the classical price-taking assumption and study the impact of orders of arbitrary size on price when the availability of liquidity is a concern in hedging. Our paper extends the earlier literature, suggesting that an environment with a permanent impact can be viewed as a special case with zero resilience, whereas an environment with a temporary impact can be viewed as a limit case with infinite resilience speed. Furthermore, our results hold for more general stochastic processes for the underlying asset: for example, for a generic Lévy process.
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Bibliographic InfoPaper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 12_12.
Date of creation: Apr 2012
Date of revision:
hedging; large traders; limited liquidity; resilience; limit order book;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
- NEP-FMK-2012-04-17 (Financial Markets)
- NEP-MST-2012-04-17 (Market Microstructure)
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.:
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SFB 373 Discussion Papers
1997,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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- repec:wop:humbsf:1997-83 is not listed on IDEAS
- Aurelien Alfonsi & Antje Fruth & Alexander Schied, 2010. "Optimal execution strategies in limit order books with general shape functions," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 143-157.
- Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.
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