Hedging and portfolio optimization in illiquid financial markets
We introduce a general continuous-time model for an illiquid financial market where the trades of a single large investor can move market prices. The model is specified in terms of parameter dependent semimartingales, and its mathematical analysis relies on the non-linear integration theory of such semimartingale families. The Itô-Wentzell formula is used to prove absence of arbitrage for the large investor, and using approximation results for stochastic integrals, we characterize the set of approximately attainable claims. We furthermore show how to compute superreplication prices and discuss the large investor's utility maximization problem.
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- Kramkov, D.O., 1994. "Optional decomposition of supermartingales and hedging contingent claims in incomplete security markets," Discussion Paper Serie B 294, University of Bonn, Germany.
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