Pricing derivatives under jump-diffusion model in the underlying in markets with stochastic liquidity
One failure of the Black-Scholes valuation model is to assume that the trading activities of agents have no effect on prices, an assumption that it can only be fulfilled in perfectly liquid markets, making the model very restrictive. This element has already been considered in some studies that inco...
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| Formato: | Artículo (Article) |
| Lenguaje: | Español (Spanish) |
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Facultad de Finanzas, Gobierno y Relaciones Internacionales
2022
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| Acceso en línea: | https://revistas.uexternado.edu.co/index.php/odeon/article/view/7838 |
| Sumario: | One failure of the Black-Scholes valuation model is to assume that the trading activities of agents have no effect on prices, an assumption that it can only be fulfilled in perfectly liquid markets, making the model very restrictive. This element has already been considered in some studies that incorporate the effect of agents’ trading activities assuming a continuous process for price dynamics, however, financial markets show that a better description of the price dynamics of Risky assets must incorporate random jumps. The contribution of this document is to consider the problem of the valuation of derivatives in illiquid markets where the price of the underlying asset follows a diffusion process with jumps. The corresponding non-linear partial differential equation of valuation is presented and the trading strategy that minimizes the variance of the hedge is described. |
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