Hedging, Arbitrage, and Optimality with Superlinear Frictions
Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences
University of Edinburgh - School of Mathematics
August 28, 2013
Boston U. School of Management Research Paper No. 2013-8
In a continuous-time model with multiple assets described by cadlag processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices arbitrarily unfavorable for high trading intensity. With such frictions, dual elements correspond to a pair of a shadow execution price combined with an equivalent martingale measure. For utility functions defined on the real line, optimal strategies exist even if arbitrage is present, because it is not scalable at will.
Number of Pages in PDF File: 23
Keywords: hedging, arbitrage, price-impact, frictions, utility maximization
JEL Classification: G11, G12
Date posted: August 28, 2013 ; Last revised: October 9, 2013
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