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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- Jouini, Elyès & Kallal, Hedi, 1993. "General equilibrium with producers and brokers existence and regularity," Economics Papers from University Paris Dauphine 123456789/5640, Paris Dauphine University.
- 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.
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- RØdiger Frey, 1998. "Perfect option hedging for a large trader," Finance and Stochastics, Springer, vol. 2(2), pages 115-141.
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