Optimal investment and contingent claim valuation in illiquid markets

Teemu Pennanen ()

Finance and Stochastics, 2014, vol. 18, issue 4, 733-754

Abstract: This paper extends basic results on arbitrage bounds and attainable claims to illiquid markets and general swap contracts where both claims and premiums may have multiple payout dates. Explicit consideration of swap contracts is essential in illiquid markets where the valuation of swaps cannot be reduced to the valuation of cumulative claims at maturity. We establish the existence of optimal trading strategies and the lower semicontinuity of the optimal value of optimal investment under conditions that extend the no-arbitrage condition in the classical linear market model. All results are derived with the “direct method” without resorting to duality arguments. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Illiquidity; Optimal investment; Reserving; Indifference pricing; Swap contracts; 52A07; 91B25; 91B26; 91B30; G13; G22; G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s00780-014-0240-0

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