HEDGING, ARBITRAGE AND OPTIMALITY WITH SUPERLINEAR FRICTIONS

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...

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Bibliographic Details
Published in:The Annals of applied probability 2015-08, Vol.25 (4), p.2066-2095
Main Authors: Guasoni, Paolo, Rásonyi, Miklós
Format: Article
Language:English
Subjects:
91G10
91G80
Arbitrage
frictions
Hedging
Mathematical models
price-impact
utility maximization
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Summary: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.
ISSN:1050-5164
2168-8737
DOI:10.1214/14-AAP1043