Almost-sure hedging with permanent price impact
Pricing of Securities
2015-03-19 v1 Probability
Trading and Market Microstructure
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 super-hedging a European option. Our main result is the derivation of a quasi-linear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy.
Keywords
Cite
@article{arxiv.1503.05475,
title = {Almost-sure hedging with permanent price impact},
author = {B. Bouchard and G. Loeper and Y. Zou},
journal= {arXiv preprint arXiv:1503.05475},
year = {2015}
}