Superhedging in illiquid markets

Teemu Pennanen

Papers from arXiv.org

Abstract: We study contingent claims in a discrete-time market model where trading costs are given by convex functions and portfolios are constrained by convex sets. In addition to classical frictionless markets and markets with transaction costs or bid-ask spreads, our framework covers markets with nonlinear illiquidity effects for large instantaneous trades. We derive dual characterizations of superhedging conditions for contingent claim processes in a market without a cash account. The characterizations are given in terms of stochastic discount factors that correspond to martingale densities in a market with a cash account. The dual representations are valid under a topological condition and a weak consistency condition reminiscent of the ``law of one price'', both of which are implied by the no arbitrage condition in the case of classical perfectly liquid market models. We give alternative sufficient conditions that apply to market models with nonlinear cost functions and portfolio constraints.

Date: 2008-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://arxiv.org/pdf/0807.2962 Latest version (application/pdf)

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:arx:papers:0807.2962

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().