Scaling limits for super-replication with transient price impact

DOI10.3150/19-BEJ1189MaRDI QIDQ2174997zbMATH OpenFDO

Authors Peter Bank, Yan Dolinsky

Publication date 27 April 2020

Published in Bernoulli (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1810.07832, https://projecteuclid.org/euclid.bj/1587974537

zbMATH Keywords

binomial modelliquidityscaling limitsuper-replicationtransient price impact

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We prove a scaling limit theorem for the super-replication cost of options in a Cox--Ross--Rubinstein binomial model with transient price impact. The correct scaling turns out to keep the market depth parameter constant while resilience over fixed periods of time grows in inverse proportion with the duration between trading times. For vanilla options, the scaling limit is found to coincide with the one obtained by PDE methods in [12] for models with purely temporary price impact. These models are a special case of our framework and so our probabilistic scaling limit argument allows one to expand the scope of the scaling limit result to path-dependent options.

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Cites work

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Cited in

(8)

• Scaling limits of processes with fast nonlinear mean reversion
• Reducing Obizhaeva-Wang-type trade execution problems to LQ stochastic control problems
• On the super-replicating approach when trading a derivative is limited
• Optimal trade execution in an order book model with stochastic liquidity parameters
• The value of insider information for super-replication with quadratic transaction costs
• Super-replication with fixed transaction costs
• Continuous-time duality for superreplication with transient price impact
• The scaling limit of superreplication prices with small transaction costs in the multivariate case

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