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Mitja STADJE – Perfect Hedging Under Endogenous Permanent Market Impacts
October 2, 2017, 3:00 pm - 4:00 pm
Joint seminar CMAP-CREST-ENSTA “Stochastic models in Finance”
1st Monday of each month
Time: 15:00 pm – 16:0 pm
Date: 02th of October 2017
Place: Room 3005.
Mitja STADJE – “Perfect Hedging Under Endogenous Permanent Market Impacts”.
We model a nonlinear price curve quoted in a market as the utility indifference curve of a representative liquidity supplier. As the utility function we adopt a g-expectation. In contrast to the standard framework of financial engineering, a trader is no more price taker as any trade has a permanent market impact via an effect to the supplier’s inventory. The P\&L of a trading strategy is written as a nonlinear stochastic integral. Under this market impact model, we introduce a completeness condition under which any derivative can be perfectly replicated by a dynamic trading strategy. In the special case of a Markovian setting the corresponding pricing and hedging can be done by solving a semi-linear PDE.
Caroline HILLAIRET (CREST ) and Peter TANKOV (CREST)
Address : ENSAE ParisTech 5, avenue Henry Le Chatelier 91120 Palaiseau, How to come?