Superreplication when trading at market indifference prices (Q261922)

The paper focuses on the nonlinear large investor model with market indifference prices. The model does not postulate a local cost term depending on the size of the current transaction which would be attributed to a temporary market impact. Instead, market indifference prices are viewed as a way to specify systematically the permanent price impact of the transaction. In this framework, efficient friction is reduced to the mild requirement that large positions of the investor potentially lead to large losses, a fact from which the existence of superreplicating strategies is derived. Efficient friction is established under a tail condition on the conditional distributions of the traded securities. It is also proved that strict monotonicity of the conditional essential infima and suprema of the security prices is sufficient for efficient friction. The main results are illustrated with several examples.