# Illiquidity and Derivative Valuation

@article{Horst2010IlliquidityAD, title={Illiquidity and Derivative Valuation}, author={Ulrich Horst and Felix Naujokat}, journal={arXiv: Trading and Market Microstructure}, year={2010} }

In illiquid markets, option traders may have an incentive to increase their portfolio value by using their impact on the dynamics of the underlying. We provide a mathematical framework within which to value derivatives under market impact in a multi-player framework by introducing strategic interactions into the Almgren & Chriss (2001) model. Specifically, we consider a financial market model with several strategically interacting players that hold European contingent claims and whose trading…

## 17 Citations

Large Traders and Illiquid Options: Hedging vs. Manipulation

- Economics
- 2011

In this article, we study the effects on derivative pricing arising from price impacts by large traders. When a large trader issues a derivative and (partially) hedges his risk by trading in the…

Closed-Form Solutions for Option Hedging with Market Impact

- Economics
- 2012

We present a highly-intuitive closed-form delta-hedging result for a large investor whose trades generate adverse market impact. Unlike the complete-market or proportional-transaction-cost cases, the…

A Class of Optimal Liquidation Problem with a Nonlinear Temporary Market Impact

- MathematicsMathematical Problems in Engineering
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We extend the self-exciting model by assuming that the temporary market impact is nonlinear and the coefficient of the temporary market impact is an exponential function. Through optimal control…

Dynamic Programming and Trade Execution

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- 2013

A novel trading model is introduced that captures the active-versus-passive order tradeoff faced by a broker when benchmarked to VWAP (Volume Weighted Average Price), and a highly intuitive dynamic solution is derived.

Optimal Liquidation Behaviour Analysis for Stochastic Linear and Nonlinear Systems of Self-Exciting Model with Decay

- MathematicsComplex.
- 2021

When the market environment changes, we extend the self-exciting price impact model and further analysis of investors’ liquidation behaviour. It is assumed that the model is accompanied by an…

Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes

- Mathematics, Computer Science
- 2014

A new type of multiplicative error model (MEM) based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations is proposed.

Executive compensation regulation and the dynamics of the pay-performance sensitivity

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- 2010

A substantial number of empirical studies on the linear relationship between executive compensation and firm performance for European firms suggest that the pay-performance sensitivity is not…

Parametric estimation of risk neutral density functions

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- 2012

This chapter deals with the estimation of risk neutral distributions for pricing index options resulting from the hypothesis of the risk neutral valuation principle. After justifying this hypothesis,…

Context effects as customer reaction on delisting of brands

- Business
- 2010

The delisting of brands is frequently used by retailers to strengthen their negotiating position with the manufacturers and suppliers of their product assortment. However, retailers and manufacturers…

Sociodemographic, Economic, and Psychological Drivers of the Demand for Life Insurance: Evidence from the German Retirement Income Act

- Economics
- 2010

We exploit the natural experiment of the 2005 income tax reform in Germany to study the effects of tax incentives on consumer behavior in life insurance markets. Our empirical analysis of…

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