Related papers: Hedging in an equilibrium-based model for a large …
The question of pricing and hedging a given contingent claim has a unique solution in a complete market framework. When some incompleteness is introduced, the problem becomes however more difficult. Several approaches have been adopted in…
We model a nonlinear price curve quoted in a market as the utility indifference curve of a representative liquidity supplier. As the utility function we adopt a g-expectation. In contrast to the standard framework of financial engineering,…
In illiquid markets, option traders may have an incentive to increase their portfolio value by using their impact on the dynamics of the underlying. We provide a mathematical framework within which to value derivatives under market impact…
The continuous-time version of Kyle's (1985) model is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has…
We propose a pricing technique based on coherent risk measures, which enables one to get finer price intervals than in the No Good Deals pricing. The main idea consists in splitting a liability into several parts and selling these parts to…
This study investigates the prevention of market manipulation using a price-impact model of financial market trading as a linear system. First, I define a trading game between speculators such that they implement a manipulation trading…
In this short note, we will show how to optimize the portfolio of a large trader whose hedging strategy affects the price of his assets.
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We…
We consider a market model that consists of financial investors and producers of a commodity. Producers optionally store some production for future sale and go short on forward contracts to hedge the uncertainty of the future commodity…
This paper develops a model for option market making in which the hedging activity of the market maker generates price impact on the underlying asset. The option order flow is modeled by Cox processes, with intensities depending on the…
This paper investigates the optimal hedging strategies of an informed broker interacting with multiple traders in a financial market. We develop a theoretical framework in which the broker, possessing exclusive information about the drift…
We develop a single-period model for a large economic agent who trades with market makers at their utility indifference prices. A key role is played by a pair of conjugate saddle functions associated with the description of Pareto optimal…
Traders constantly consider the price impact associated with changing their positions. This paper seeks to understand how price impact emerges from the quoting strategies of market makers. To this end, market making is modeled as a dynamic…
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification…
In market modeling, one often treats buyers as a homogeneous group. In this paper we consider buyers with heterogeneous preferences and products available in many variants. Such a framework allows us to successfully model various market…
We consider the problem of hedging a European contingent claim in a Bachelier model with transient price impact as proposed by Almgren and Chriss. Following the approach of Rogers and Singh and Naujokat and Westray, the hedging problem can…
We study utility indifference prices and optimal purchasing quantities for a contingent claim, in an incomplete semi-martingale market, in the presence of vanishing hedging errors and/or risk aversion. Assuming that the average indifference…
The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic…
We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…