Option prices under liquidity risk as weak solutions of semilinear diffusion equations

Matthias Albrecht Fahrenwaldt, Alexandre F. Roch

Research output: Contribution to journalArticle

45 Downloads (Pure)

Abstract

Prices of financial options in a market with liquidity risk are shown to be weak solutions of a class of semilinear parabolic partial differential equations with nonnegative characteristic form. We prove the existence and uniqueness of such solutions, and then show the solutions correspond to option prices as defined in terms of replication in a probabilistic setup. We obtain an asymptotic representation of the price and the hedging strategy as a liquidity parameter converges to zero.
Original languageEnglish
Article number12
Number of pages32
JournalNonlinear Differential Equations and Applications
Volume24
Issue number2
Early online date18 Feb 2017
DOIs
Publication statusPublished - Apr 2017

    Fingerprint

Cite this