A closed-form pricing formula for European options in an illiquid asset market
نویسندگان
چکیده
Abstract This article addresses the problem of pricing European options when underlying asset is not perfectly liquid. A liquidity discounting factor as a function market-wide governed by mean-reverting stochastic process and sensitivity price to firstly introduced, so that impact on can be captured option model. The characteristic analytically worked out using Feynman–Kac theorem closed-form formula for successfully derived thereafter. Through numerical experiments, accuracy newly verified, significance incorporating risk into demonstrated.
منابع مشابه
Option Pricing with an Illiquid Underlying Asset Market∗
We examine how price impact in the underlying asset market affects the replication of a European contingent claim. We obtain a generalized Black-Scholes pricing PDE and establish the existence and uniqueness of a classical solution to this PDE. We show that unlike the case with transaction costs, replication in the presence of price impact is always cheaper than superreplication. This model imp...
متن کاملPricing in an illiquid real estate market
Using a repeat sales data set, this paper tests whether a single small seller can influence the selling price of their house. We find that this influence exists and that it dominates the influence of commonly-used market conditions. Since the estimated magnitude of this effect is much higher than expected, we verify the estimate using several supplementary tests. JEL: C78, D80, R21, R31
متن کاملAn Approximate Formula for Pricing American Options
An approximate formula for pricing American options along the lines of MacMillan [1986] and Barone-Adesi and Whaley [1987] is presented. This analytical approximation is as efficient as the existing ones, but it is remarkably more accurate. In particular, it yields good results for long maturity options for which the existing analytical ones fare poorly. It is also demonstrated that this approx...
متن کاملA Closed-Form Formula for the Fair Allocation of Gains in Cooperative N-Person Games
Abstract This paper provides a closed-form optimal solution to the multi-objective model of the fair allocation of gains obtained by cooperation among all players. The optimality of the proposed solution is first proved. Then, the properties of the proposed solution are investigated. At the end, a numerical example in inventory control environment is given to demonstrate the application and t...
متن کاملPortfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR ...
متن کاملذخیره در منابع من
با ذخیره ی این منبع در منابع من، دسترسی به آن را برای استفاده های بعدی آسان تر کنید
ژورنال
عنوان ژورنال: Financial Innovation
سال: 2022
ISSN: ['2199-4730']
DOI: https://doi.org/10.1186/s40854-022-00337-6