 On option pricing in illiquid markets with random jumpsYoussef El-Khatib and Abdulnasser Hatemi-J MPRA Paper from University Library of Munich, Germany Abstract: One of the shortcomings of the Black and Scholes model on option pricing is the assumption that trading of the underlying asset does not affect the price of that asset. This asumption can be fulfilled only in perfectly liquid markets. Since most markets are illqiud, this asumption might be too restrictive. Thus, taking into account the price impact in option pricing is an important issue. This issue has been dealt with, to some extent, for illiquid markets by assuming a continuous process, mainly based on the Brownian motion. However, the recent financial crisis and its effects on the global stock markets have propagated the urgent need for more realistic models where the stochastic process describing the price trajectories involves random jumps. Nontheless, works related to markets with jumps are scant compared to the continuous ones. In addition, these prevoius studies do not deal with illiquid markets. The contribution of this paper is to tackle the pricing problem for options in illiquid markets with jumps as well as the hedging strategy within this context, which is the first of its kind to the best knowledge. Keywords: Options pricing; illiquid markets; jump diffusion; incomplete markets. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:45172 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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