Hedging, arbitrage and optimality with superlinear frictions

Paolo Guasoni and Mikl\'os R\'asonyi

Papers from arXiv.org

Abstract: In a continuous-time model with multiple assets described by c\`{a}dl\`{a}g processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices arbitrarily unfavorable for high trading intensity. Such frictions induce a duality between feasible trading strategies and shadow execution prices with a martingale measure. Utility maximizing strategies exist even if arbitrage is present, because it is not scalable at will.

Date: 2015-06
New Economics Papers: this item is included in nep-mst and nep-upt
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Citations: View citations in EconPapers (12)

Published in Annals of Applied Probability 2015, Vol. 25, No. 4, 2066-2095

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