Option pricing in the large risk aversion, small transaction cost limit

2011/02/17 by Ryan Hynd, Hynd, Ryan
Economics, Econometrics and Finance · #Analysis of PDEs (math.AP) #FOS: Mathematics #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.1102.3516

openalex publication_date 2011/02/17 · openalex created_date 2022/10/04 · openalex updated_date 2026/07/28

Abstract

We characterize the price of a European option on several assets for a very risk averse seller, in a market with small transaction costs as a solution of a nonlinear diffusion equation. This problem turns out to be one of asymptotic analysis of parabolic PDE, and the interesting feature is the role of a nonlinear PDE eigenvalue problem. In particular, we generalize previous work of Guy Barles and H. Mete Soner who studied this problem for a European option on a single asset.

Citations

• The Dirichlet problem for nonlinear second order elliptic equations, III: Functions of the eigenvalues of the Hessian
• The Pricing of Options and Corporate Liabilities

Related

• Analysis of the nonlinear option pricing model under variable transaction costs
• Option Pricing in a Regime Switching Jump Diffusion Model
• Pricing European Options in Realistic Markets
• Efficient European and American option pricing under a jump-diffusion process
• European Option Pricing with Transaction Costs and Stochastic Volatility: an Asymptotic Analysis