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Option Pricing and Hedging with Liquidity Costs and Market Impact

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Econophysics and Sociophysics: Recent Progress and Future Directions

Part of the book series: New Economic Windows ((NEW))

Abstract

We study the influence of taking liquidity costs and market impact into account when hedging a contingent claim. In the continuous time setting and under the assumption of perfect replication, we derive a fully non-linear pricing partial differential equation, and characterize its parabolic nature according to the value of a numerical parameter interpreted as a relaxation coefficient for market impact. We also investigate the case of stochastic volatility models with pseudo-optimal strategies.

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Author information

Authors and Affiliations

  1. Laboratory MICS, CentraleSupélec, 92290, Châtenay-Malabry, France

    F. Abergel

  2. Mathematical Sciences, Monash University, Clayton, VIC, 3800, Australia

    G. Loeper

Authors
  1. F. Abergel
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  2. G. Loeper
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Corresponding author

Correspondence to F. Abergel .

Editor information

Editors and Affiliations

  1. CentraleSupélec , Châtenay Malabry, France

    Frédéric Abergel

  2. Dept of Physics, Graduate School of Science, Kyoto University , Kyoto, Kyoto, Japan

    Hideaki Aoyama

  3. Saha Institute of Nuclear Physics , Kolkata, India

    Bikas K. Chakrabarti

  4. Jawaharlal Nehru University , New Delhi, India

    Anirban Chakraborti

  5. Department of Physics and Astrophysics, University of Delhi, New Delhi, India

    Nivedita Deo

  6. Zakir Husain Centre for Educational Studiess, Jawaharlal Nehru University, New Delhi, India

    Dhruv Raina

  7. Administrative Sciences, Metropolitan College, Boston University, Boston, USA

    Irena Vodenska

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Abergel, F., Loeper, G. (2017). Option Pricing and Hedging with Liquidity Costs and Market Impact. In: Abergel, F., et al. Econophysics and Sociophysics: Recent Progress and Future Directions. New Economic Windows. Springer, Cham. https://doi.org/10.1007/978-3-319-47705-3_2

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