A closed-form pricing formula for European options in an illiquid asset market

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.