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Hedging through a Limit Order Book with Varying Liquidity

Author

Listed:
  • Rossella Agliardi

    (Dipartimento di Matematica, Università di Bologna, Italy; IMATI - CNR, Italy)

  • Ramazan Gençay

    (Department of Economics, Simon Fraser University, Canada; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

We relax the classical price-taking assumption and study the impact of orders of arbitrary size on price when the availability of liquidity is a concern in hedging. Our paper extends the earlier literature, suggesting that an environment with a permanent impact can be viewed as a special case with zero resilience, whereas an environment with a temporary impact can be viewed as a limit case with infinite resilience speed. Furthermore, our results hold for more general stochastic processes for the underlying asset: for example, for a generic Lévy process.

Suggested Citation

  • Rossella Agliardi & Ramazan Gençay, 2012. "Hedging through a Limit Order Book with Varying Liquidity," Working Paper series 12_12, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:12_12
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    File URL: http://www.rcea.org/RePEc/pdf/wp12_12.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    hedging; large traders; limited liquidity; resilience; limit order book;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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