Pricing and Hedging Contingent Claims with Liquidity Costs and Market Impact

Download or read book Pricing and Hedging Contingent Claims with Liquidity Costs and Market Impact written by Frederic Abergel and published by . This book was released on 2013 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.