2014/09/21 by Krzysztof Turek, Turek, Krzysztof, K. Turek
Economics, Econometrics and Finance · #93E20 #Economic theories and models #FOS: Economics and business #Financial Markets and Investment Strategies #Financial Risk and Volatility Modeling #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1409.6042
openalex publication_date 2014/09/21 · openalex created_date 2022/09/11 · openalex updated_date 2026/07/28
Paper is based on "The cost of illiquidity and its effects on hedging", L. C.\nG. Rogers and Surbjeet Singh, 2010. We generalize its thesis to constant\nelasticity model, which own previously used Black-Schoels model as a special\ncase. The Goal of this article is to find optimal hedging strategy of European\ncall/put option in illiquid environment. We understand illiquidity as a non\nlinear transaction cost function depending only on rate of change of our\nportfolio. In case this function is quadratic, optimal policy is given by\nsystem of 3 PDE. In addition we show, that for small \ε costs of\nselling portfolio in time T be important (O(\ε)) and shouldn't be\nneglected in Value function (o(\εk)- our result).\n