No free lunch for large investors

Peter Bank

No 1999,37, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: We study an extension of the classical B1ack-Scholes model which accounts for feedback effects from trading in an imperfectly elastic market. The proposed semi-martingale model may be viewed as a compromise between the diffusion approach in, e.g., (Cuoco and Cvitanic 1998), (Cvitanic and Ma 1996) and the reaction function framework used in, e.g., (Jarrow 1992), (Frey and Stremme 1997). We motivate our model by a discrete-time approximation and provide sufficient conditions which exclude arbitrage opportunities for large investors.

Keywords: large investor; feedback effect; no arbitrage; illiquid markets; market elasticity (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:199937

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