Pricing and hedging contingent claims with liquidity costs and market impact
We study the influence of taking liquidity costs and market impact into account when hedging a contingent claim, first in the discrete time setting, then in continuous time. In the latter case and in a complete market, we derive a fully non-linear pricing partial differential equation, and characterizes its parabolic nature according to the value of a numerical parameter naturally interpreted as a relaxation coefficient for market impact. We then investigate the more challenging case of stochastic volatility models, and prove the parabolicity of the pricing equation in a particular case.
|Date of creation:||19 Mar 2013|
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|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00802402|
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