The Annals of Applied Probability

Hedging, arbitrage and optimality with superlinear frictions

Paolo Guasoni and Miklós Rásonyi

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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

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

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

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Mathematical Reviews number (MathSciNet)

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

Hedging arbitrage price-impact frictions utility maximization


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.

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