Option pricing in constant elasticity of variance model with liquidity costs

Krzysztof Turek

Papers from arXiv.org

Abstract: Paper is based on "The cost of illiquidity and its effects on hedging", L. C. G. Rogers and Surbjeet Singh, 2010. We generalize its thesis to constant elasticity model, which own previously used Black-Schoels model as a special case. The Goal of this article is to find optimal hedging strategy of European call/put option in illiquid environment. We understand illiquidity as a non linear transaction cost function depending only on rate of change of our portfolio. In case this function is quadratic, optimal policy is given by system of 3 PDE. In addition we show, that for small $\epsilon$ costs of selling portfolio in time $T$ be important ($O(\epsilon)$) and shouldn't be neglected in Value function ($o(\epsilon^k)$- our result).

Date: 2014-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1409.6042 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1409.6042

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().