Utility‐based pricing and hedging of contingent claims in Almgren‐Chriss model with temporary price impact

Ibrahim Ekren and Sergey Nadtochiy

Mathematical Finance, 2022, vol. 32, issue 1, 172-225

Abstract: In this paper, we construct the utility‐based optimal hedging strategy for a European‐type option in the Almgren‐Chriss model with temporary price impact. The main mathematical challenge of this work stems from the degeneracy of the second order terms and the quadratic growth of the first‐order terms in the associated Hamilton‐Jacobi‐Bellman equation, which makes it difficult to establish sufficient regularity of the value function needed to construct the optimal strategy in a feedback form. By combining the analytic and probabilistic tools for describing the value function and the optimal strategy, we establish the feedback representation of the latter. We use this representation to derive an explicit asymptotic expansion of the utility indifference price of the option, which allows us to quantify the price impact in options' market via the price impact coefficient in the underlying market.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/mafi.12330

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:bla:mathfi:v:32:y:2022:i:1:p:172-225

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().