23 Pages Posted: 28 Aug 2013 Last revised: 9 Oct 2013
Date Written: August 28, 2013
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: 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
By Jim Gatheral