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Super-replicating Bounds on European Option Prices when the Underlying Asset is Illiquid

João Amaro de Matos () and Paula Antão ()
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Paula Antão: School of Economics, Universidade Nova de Lisboa

Economics Bulletin, 2001, vol. 7, issue 1, 1-7

Abstract: We derive super-replicating bounds on European option prices when the underlying asset is illiquid. Illiquidity is taken as the impossibility of transacting the underlying asset at some points in time, generating market incompleteness. We conclude that option price bounds follow a Black-Scholes partial differential equation where the volatility term is adjusted to reflect different levels of illiquidity.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2001-10-23
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