The Annals of Applied Probability

Hedging, arbitrage and optimality with superlinear frictions

Paolo Guasoni and Miklós Rásonyi

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Abstract

In a continuous-time model with multiple assets described by càdlàg 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. Such frictions induce a duality between feasible trading strategies and shadow execution prices with a martingale measure. Utility maximizing strategies exist even if arbitrage is present, because it is not scalable at will.

Article information

Source
Ann. Appl. Probab. Volume 25, Number 4 (2015), 2066-2095.

Dates
Received: August 2013
Revised: March 2014
First available in Project Euclid: 21 May 2015

Permanent link to this document
https://projecteuclid.org/euclid.aoap/1432212437

Digital Object Identifier
doi:10.1214/14-AAP1043

Mathematical Reviews number (MathSciNet)
MR3349002

Zentralblatt MATH identifier
06464845

Subjects
Primary: 91G10: Portfolio theory 91G80: Financial applications of other theories (stochastic control, calculus of variations, PDE, SPDE, dynamical systems)

Keywords
Hedging arbitrage price-impact frictions utility maximization

Citation

Guasoni, Paolo; Rásonyi, Miklós. Hedging, arbitrage and optimality with superlinear frictions. Ann. Appl. Probab. 25 (2015), no. 4, 2066--2095. doi:10.1214/14-AAP1043. https://projecteuclid.org/euclid.aoap/1432212437.


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