Perfect hedging under endogenous permanent market impacts

Masaaki Fukasawa () and Mitja Stadje
Additional contact information
Masaaki Fukasawa: Osaka University
Mitja Stadje: Ulm University

Finance and Stochastics, 2018, vol. 22, issue 2, No 7, 417-442

Abstract: Abstract We model a nonlinear price curve quoted in a market as the utility indifference curve of a representative liquidity supplier. As the utility function, we adopt a g $g$ -expectation. In contrast to the standard framework of financial engineering, a trader is no longer a price taker as any trade has a permanent market impact via an effect on the supplier’s inventory. The P&L of a trading strategy is written as a nonlinear stochastic integral. Under this market impact model, we introduce a completeness condition under which any derivative can be perfectly replicated by a dynamic trading strategy. In the special case of a Markovian setting, the corresponding pricing and hedging can be done by solving a semilinear PDE.

Keywords: Nonlinear stochastic integral; g $g$ -Expectation; Market impact; 60H05; 91G80 (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-017-0352-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-017-0352-4

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-017-0352-4

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().