Liquidity Costs: A New Numerical Methodology and an Empirical Study

Christophe Michel, Victor Reutenauer, Denis Talay and Etienne Tanré

Applied Mathematical Finance, 2016, vol. 23, issue 1, 57-79

Abstract: We consider rate swaps which pay a fixed rate against a floating rate in the presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit strategy optimizing an expected function of the hedging error. We here propose an efficient algorithm based on the stochastic gradient method to compute an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numerical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost.

Date: 2016
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1350486X.2016.1164608 (text/html)
Access to full text is restricted to subscribers.

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:taf:apmtfi:v:23:y:2016:i:1:p:57-79

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486X.2016.1164608

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().