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Almost-sure hedging with permanent price impact

Bouchard, Bruno; Loeper, Grégoire; Zou, Yiyi (2016), Almost-sure hedging with permanent price impact, Finance and Stochastics, 20, 3, p. 741-771. 10.1007/s00780-016-0295-1

Type
Article accepté pour publication ou publié
External document link
https://arxiv.org/abs/1503.05475v1
Date
2016
Journal name
Finance and Stochastics
Volume
20
Number
3
Publisher
Springer
Pages
741-771
Publication identifier
10.1007/s00780-016-0295-1
Metadata
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Author(s)
Bouchard, Bruno

Loeper, Grégoire

Zou, Yiyi
Abstract (EN)
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 superhedging a European option. Our main result is the derivation of a quasilinear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy.
Subjects / Keywords
Hedging; price impact
JEL
G13 - Contingent Pricing; Futures Pricing
G12 - Asset Pricing; Trading Volume; Bond Interest Rates

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