Liquidity costs: a new numerical methodology and an empirical study

Christophe Michel, Victor Reutenauer (), Denis Talay and Etienne Tanré ()
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Christophe Michel: FIM - Service Interest Rates and Hybrid Quantitative Research - CALYON
Victor Reutenauer: Fotonower
Denis Talay: TOSCA - TO Simulate and CAlibrate stochastic models - CRISAM - Inria Sophia Antipolis - Méditerranée - Inria - Institut National de Recherche en Informatique et en Automatique - IECL - Institut Élie Cartan de Lorraine - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique
Etienne Tanré: TOSCA - TO Simulate and CAlibrate stochastic models - CRISAM - Inria Sophia Antipolis - Méditerranée - Inria - Institut National de Recherche en Informatique et en Automatique - IECL - Institut Élie Cartan de Lorraine - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique

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Abstract: We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit optimal strategy minimizing a risk measure of the hedging error. We here propose an efficient algorithm, based on the stochas-tic gradient method, to obtain an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numer-ical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost.

Keywords: Optimization optimisation; Stochastic Algorithms; Interest rates derivatives (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cmp and nep-mst
Note: View the original document on HAL open archive server: https://inria.hal.science/hal-01098096v3
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Published in Applied Mathematical Finance, 2016, ⟨10.1080/1350486X.2016.1164608⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01098096

DOI: 10.1080/1350486X.2016.1164608

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