Almost-sure hedging with permanent price impact

Bouchard, Bruno; Loeper, Grégoire; Zou, Yiyi

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

Number

Publisher

Springer

Pages

741-771

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