Option pricing for large agents
This paper considers arbitrage-free option pricing in the presence of large agents. These large agents have a significant market power, and their trading strategies influence the dynamics of the financial asset prices. First, a simple asset pricing model in the presence of large agents is presented. Then a nonlinear partial differential equation is found for the prices of European options in the model. The unit option price depends on the large agent's asset holdings. Finally, a game model is introduced for the interaction between different market players. In this game, the outstanding number of options, as well as the option price, is found as a Nash equilibrium.
Volume (Year): 9 (2002)
Issue (Month): 4 ()
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- Kreps, David M., 1981. "Arbitrage and equilibrium in economies with infinitely many commodities," Journal of Mathematical Economics, Elsevier, vol. 8(1), pages 15-35, March.
- Robert A. Jarrow, 2008.
"Derivative Security Markets, Market Manipulation, and Option Pricing Theory,"
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World Scientific Publishing Co. Pte. Ltd..
- Jarrow, Robert A., 1994. "Derivative Security Markets, Market Manipulation, and Option Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 241-261, June.
- Jouini, Elyes & Kallal, Hedi, 1993. "General equilibrium with producers and brokers : Existence and regularity," Economics Letters, Elsevier, vol. 41(3), pages 257-263.
- RØdiger Frey, 1998. "Perfect option hedging for a large trader," Finance and Stochastics, Springer, vol. 2(2), pages 115-141.
- Platen, Eckhard & Martin Schweizer, 1994. "On Smile and Skewness," Discussion Paper Serie B 302, University of Bonn, Germany.
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