Hedging, arbitrage and optimality with superlinear frictions
Pricing of Securities
2015-06-22 v1 Probability
Abstract
In a continuous-time model with multiple assets described by c\`{a}dl\`{a}g processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices arbitrarily unfavorable for high trading intensity. Such frictions induce a duality between feasible trading strategies and shadow execution prices with a martingale measure. Utility maximizing strategies exist even if arbitrage is present, because it is not scalable at will.
Keywords
Cite
@article{arxiv.1506.05895,
title = {Hedging, arbitrage and optimality with superlinear frictions},
author = {Paolo Guasoni and Miklós Rásonyi},
journal= {arXiv preprint arXiv:1506.05895},
year = {2015}
}
Comments
Published at http://dx.doi.org/10.1214/14-AAP1043 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)