Hedging with Liquidity Risk under CEV Diffusion

Sang-Hyeon Park and Kiseop Lee
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Sang-Hyeon Park: Asset Management Department, Daishin Securities, Seoul 06131, Korea
Kiseop Lee: Department of Statistics, Purdue University, West Lafayette, IN 47907, USA

Risks, 2020, vol. 8, issue 2, 1-12

Abstract: We study a discrete time hedging and pricing problem in a market with the liquidity risk. We consider a discrete version of the constant elasticity of variance (CEV) model by applying Leland’s discrete time replication scheme. The pricing equation becomes a nonlinear partial differential equation, and we solve it by a multi scale perturbation method. A numerical example is provided.

Keywords: discrete time hedging; liquidity risk; asymptotic expansion; CEV diffusion (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
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