Hedging through a Limit Order Book with Varying Liquidity

Rossella Agliardi () and Ramazan Gençay ()
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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
Authors registered in the RePEc Author Service: Ramazan Gencay

Working Paper series from Rimini Centre for Economic Analysis

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.

Keywords: hedging; large traders; limited liquidity; resilience; limit order book (search for similar items in EconPapers)
JEL-codes: C22 G13 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-fmk and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:12_12

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