Duality and Convergence for Binomial Markets with Friction
We prove limit theorems for the super-replication cost of European options in a Binomial model with friction. The examples covered are markets with proportional transaction costs and the illiquid markets. The dual representation for the super-replication cost in these models are obtained and used to prove the limit theorems. In particular, the existence of the liquidity premium for the continuous time limit of the model proposed in  is proved. Hence, this paper extends the previous convergence result of  to the general non-Markovian case. Moreover, the special case of small transaction costs yields, in the continuous limit, the $G$-expectation of Peng as earlier proved by Kusuoka in .
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- Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
- Umut Cetin & L.C.G. Rogers, 2007.
"Modeling liquidity effects in discrete time,"
LSE Research Online Documents on Economics
2844, London School of Economics and Political Science, LSE Library.
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