Related papers: Hedging Non-Tradable Risks with Transaction Costs …
The classical discrete time model of proportional transaction costs relies on the assumption that a feasible portfolio process has solvent increments at each step. We extend this setting in two directions, allowing for convex transaction…
We study optimal trade execution strategies in financial markets with discrete order flow. The agent has a finite liquidation horizon and must minimize price impact given a random number of incoming trade counterparties. Assuming that the…
It is well-known that using delta hedging to hedge financial options is not feasible in practice. Traders often rely on discrete-time hedging strategies based on fixed trading times or fixed trading prices (i.e., trades only occur if the…
We consider the problem of Adverse Selection and optimal derivative design within a Principal-Agent framework. The principal's income is exposed to non-hedgeable risk factors arising, for instance, from weather or climate phenomena. She…
We prove the existence of an equilibrium in a model with transaction costs and price impact where two agents are incentivized to trade towards a target. The two types of frictions -- price impact and transaction costs -- lead the agents to…
A hypothetical risk-neutral agent who trades to maximize the expected profit of the next trade will approximately exhibit long-term optimal behavior as long as this agent uses the vector $p = \nabla V (t, x)$ as effective microstructure…
We consider a class of optimal portfolio choice problems in continuous time where the agent's transactions create both transient cross-impact driven by a matrix-valued Volterra propagator, as well as temporary price impact. We formulate…
We assume a continuous-time price impact model similar to Almgren-Chriss but with the added assumption that the price impact parameters are stochastic processes modeled as correlated scalar Markov diffusions. In this setting, we develop…
We consider a liquidation problem in which a risk-averse trader tries to liquidate a fixed quantity of an asset in the presence of market impact and random price fluctuations. The trader encounters a trade-off between the transaction costs…
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…
In a one-sided limit order book, satisfying some realistic assumptions, where the unaffected price process follows a Levy process, we consider a market agent that wants to liquidate a large position of shares. We assume that the agent has…
This paper studies an optimal investment and risk control problem for an insurer with default contagion and regime-switching. The insurer in our model allocates his/her wealth across multi-name defaultable stocks and a riskless bond under…
This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules…
In financial markets, agents often mutually influence each other's investment strategies and adjust their strategies to align with others. However, there is limited quantitative study of agents' investment strategies in such scenarios. In…
We introduce a novel signature approach for pricing and hedging path-dependent options with instantaneous and permanent market impact under a mean-quadratic variation criterion. Leveraging the expressive power of signatures, we recast an…
Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein--Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit…
In the seminal paper on optimal execution of portfolio transactions, Almgren and Chriss (2001) define the optimal trading strategy to liquidate a fixed volume of a single security under price uncertainty. Yet there exist situations, such as…
In this article, we introduce an algorithm called Backward Hedging, designed for hedging European and American options while considering transaction costs. The optimal strategy is determined by minimizing an appropriate loss function, which…
We study a single risky financial asset model subject to price impact and transaction cost over an finite time horizon. An investor needs to execute a long position in the asset affecting the price of the asset and possibly incurring in…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open…