Option Pricing and Hedging with Liquidity Costs and Market Impact

F Abergel, G Loeper

Research output: Chapter in Book/Report/Conference proceedingChapter (Book)Researchpeer-review

Abstract

We study the influence of taking liquidity costs and market impact into account when hedging a contingent claim. In the continuous time setting and under the assumption of perfect replication, we derive a fully non-linear pricing partial differential equation, and characterize its parabolic nature according to the value of a numerical parameter interpreted as a relaxation coefficient for market impact. We also investigate the case of stochastic volatility models with pseudo-optimal strategies.
Original languageEnglish
Title of host publicationEconophysics and Sociophysics
Subtitle of host publicationRecent Progress and Future Directions
EditorsFrédéric Abergel, Hideaki Aoyama, Bikas K. Chakrabarti, Anirban Chakraborti, Nivedita Deo, Dhruv Raina, Irena Vodenska
Place of PublicationCham Switzerland
PublisherSpringer
Pages19-40
Number of pages22
ISBN (Electronic)9783319477053
ISBN (Print)9783319477046
DOIs
Publication statusPublished - 2017

Publication series

NameNew Economic Windows
PublisherSpringer International Publishing AG
Volume6901
ISSN (Print)2039-411X
ISSN (Electronic)2039-4128

Cite this

Abergel, F., & Loeper, G. (2017). Option Pricing and Hedging with Liquidity Costs and Market Impact. In F. Abergel, H. Aoyama, B. K. Chakrabarti, A. Chakraborti, N. Deo, D. Raina, & I. Vodenska (Eds.), Econophysics and Sociophysics: Recent Progress and Future Directions (pp. 19-40). (New Economic Windows; Vol. 6901). Springer. https://doi.org/10.1007/978-3-319-47705-3_2