Hedge and speculate: replicating option payoffs with limit and market orders

DOI10.1137/18M1192706;MaRDI QIDQ4971981zbMATHFDO

Authors Álvaro Cartea, Luhui Gan, Sebastian Jaimungal

Publication date 22 November 2019

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://epubs.siam.org/doi/pdf/10.1137/18M1192706

zbMATH Keywords

high-frequency tradingmarket impactoptimal hedgingimpulse controlalgorithmic trading

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Stopping times; optimal stopping problems; gambling theory (60G40)

Recommendations

• Optimal hedging through limit orders
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Cites work

• Algorithmic and high-frequency trading
• Approximation schemes for monotone systems of nonlinear second order partial differential equations: convergence result and error estimate
• Continuous-time stochastic control and optimization with financial applications
• Curve following in illiquid markets
• Dynamic hedging portfolios for derivative securities in the presence of large transaction costs
• European Option Pricing with Transaction Costs
• HEDGING AND PORTFOLIO OPTIMIZATION UNDER TRANSACTION COSTS: A MARTINGALE APPROACH¹²
• Hedging and Portfolio Optimization in Financial Markets with a Large Trader
• Hedging of covered options with linear market impact and gamma constraint
• Hedging with temporary price impact
• High-frequency trading in a limit order book
• Incorporating order-flow into optimal execution
• Large Investor Trading Impacts on Volatility
• Liquidity risk and arbitrage pricing theory
• Liquidity risk, price impacts and the replication problem
• Optimal execution with limit and market orders
• Optimal execution with nonlinear impact functions and trading-enhanced risk
• Optimal market making
• Optimal portfolio liquidation with limit orders
• Option hedging for small investors under liquidity costs
• Option pricing and hedging with execution costs and market impact
• Option pricing with transaction costs and a nonlinear Black-Scholes equation
• Risk metrics and fine tuning of high-frequency trading strategies
• Simulations of transaction costs and optimal rehedging
• The cost of illiquidity and its effects on hedging
• The financial mathematics of market liquidity. From optimal execution to market making
• There is no nontrivial hedging portfolio for option pricing with transaction costs

Cited in

(5)

• A Leland model for delta hedging in central risk books
• Group classification for a class of non-linear models of the RAPM type
• Optimal accelerated share repurchases
• ELS pricing and hedging in a fractional Brownian motion environment
• On measuring the cost of liquidity in the limit order book

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