Almost-sure hedging with permanent price impact

DOI10.1007/S00780-016-0295-1zbMATH Open1369.91172arXiv1503.05475OpenAlexW2156894747MaRDI QIDQ309172FDOQ309172

Authors: Bruno Bouchard, Grégoire Loeper, Yiyi Zou 

Publication date: 7 September 2016

Published in: Finance and Stochastics (Search for Journal in Brave)

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.

Full work available at URL: https://arxiv.org/abs/1503.05475

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zbMATH Keywords

price impacthedging

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Dynamic programming in optimal control and differential games (49L20) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

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Cited In (18)

• Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies
• Short Communication: Utility Indifference Pricing with High Risk Aversion and Small Linear Price Impact
• Option pricing with linear market impact and nonlinear Black-Scholes equations
• Interior second derivatives estimates for nonlinear diffusions
• Utility‐based pricing and hedging of contingent claims in Almgren‐Chriss model with temporary price impact
• Hedging of covered options with linear market impact and gamma constraint
• Understanding the dual formulation for the hedging of path-dependent options with price impact
• Hedging with temporary price impact
• Hedging, arbitrage and optimality with superlinear frictions
• Second-order stochastic target problems with generalized market impact
• Optimal investment, derivative demand, and arbitrage under price impact
• Perfect hedging under endogenous permanent market impacts
• Optimal asset liquidation with multiplicative transient price impact
• Optimal accelerated share repurchases
• Stability for gains from large investors' strategies in \(M_{1}/J_{1}\) topologies
• Arbitrage theory for non convex financial market models
• Price impact on term structure
• Hedging with physical or cash settlement under transient multiplicative price impact

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