Almost-sure hedging with permanent price impact

Bruno Bouchard; Grégoire Loeper; Yiyi Zou

doi:10.1007/s00780-016-0295-1

Almost-sure hedging with permanent price impact

Bruno Bouchard, Grégoire Loeper, Yiyi Zou

Research output: Contribution to journal › Article › Research › peer-review

15 Citations (Scopus)

Abstract

We consider a financial model with permanent price impact. Continuous-time trading dynamics are derived as the limit of discrete rebalancing policies. We then study the problem of superhedging a European option. Our main result is the derivation of a quasilinear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy.

Original language	English
Pages (from-to)	741-771
Number of pages	31
Journal	Finance and Stochastics
Volume	20
Issue number	3
DOIs	https://doi.org/10.1007/s00780-016-0295-1
Publication status	Published - 1 Jul 2016
Externally published	Yes

Keywords

Hedging
Price impact

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10.1007/s00780-016-0295-1

Cite this

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AB - We consider a financial model with permanent price impact. Continuous-time trading dynamics are derived as the limit of discrete rebalancing policies. We then study the problem of superhedging a European option. Our main result is the derivation of a quasilinear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy.

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KW - Price impact

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Almost-sure hedging with permanent price impact

Abstract

Keywords

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