TY - JOUR
T1 - Option Replication in Discrete Time with Illiquidity
AU - Matsumoto, Koichi
N1 - Funding Information:
I thank the participants of Quantitative Methods in Finance Conference 2009, for their valuable comments. I also thank the anonymous referee for assistance in revising the article. This research was partially supported by the Ministry of Education, Culture, Sports, Science and Technology, Grant-in-Aid for Young Scientists (B), 19740051, 23740080.
PY - 2013
Y1 - 2013
N2 - This article studies a replication of a contingent claim in an illiquid market. We represent the liquidity as a supply curve in a discrete time model. Because the trade price of the illiquid asset is a function of the trade size in this model, it is important whether the contingent claim is physically settled or settled in cash. In both cases, we give a condition where a replication strategy exists uniquely and show some properties of the replication strategy. Further we analyse the liquidity cost numerically.
AB - This article studies a replication of a contingent claim in an illiquid market. We represent the liquidity as a supply curve in a discrete time model. Because the trade price of the illiquid asset is a function of the trade size in this model, it is important whether the contingent claim is physically settled or settled in cash. In both cases, we give a condition where a replication strategy exists uniquely and show some properties of the replication strategy. Further we analyse the liquidity cost numerically.
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U2 - 10.1080/1350486X.2012.675161
DO - 10.1080/1350486X.2012.675161
M3 - Article
AN - SCOPUS:84873965245
VL - 20
SP - 167
EP - 190
JO - Applied Mathematical Finance
JF - Applied Mathematical Finance
SN - 1350-486X
IS - 2
ER -