Hedging, Arbitrage, and Optimality with Superlinear Frictions

23 Pages Posted: 28 Aug 2013 Last revised: 9 Oct 2013

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences

Miklos Rasonyi

University of Edinburgh - School of Mathematics

Date Written: August 28, 2013

Abstract

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.

Keywords: hedging, arbitrage, price-impact, frictions, utility maximization

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Rasonyi, Miklos, Hedging, Arbitrage, and Optimality with Superlinear Frictions (August 28, 2013). Boston U. School of Management Research Paper No. 2013-8. Available at SSRN: https://ssrn.com/abstract=2317344 or http://dx.doi.org/10.2139/ssrn.2317344

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Miklos Rasonyi

University of Edinburgh - School of Mathematics ( email )

United Kingdom

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