Read e-book online Strategic Trading in Illiquid Markets (Lecture Notes in PDF

By Burkart Mönch

ISBN-10: 3540250395

ISBN-13: 9783540250395

ISBN-10: 3540263152

ISBN-13: 9783540263159

This quantity considers buying and selling options in illiquid markets from 3 views. the 1st bankruptcy provides an leading edge method of examine the interactions among the buying and selling actions of a big investor, the inventory cost, and liquidity. The framework generalizes present versions by means of introducing a stochastic liquidity issue. the pliability of the framework is illustrated via an program that offers with the pricing of a liquidity by-product. the second one bankruptcy specializes in a brand new pragmatic method of ensure optimum liquidation ideas if an investor makes use of industry orders to unwind huge defense positions in an illiquid marketplace. The 3rd bankruptcy devotes exact consciousness to iceberg orders. It offers a parsimonious framework that enables to research the explanation for using this order style through assessing the prices and merits of this buying and selling software.

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References 45 Bank, P. and D. Baum (2002): Hedging and portfolio optimization in financial markets with a large trader, Humboldt University, Berlin, Germany. Bertsimas, D. and A. W. Lo (1998): Optimal control of execution, Journal of Financial Markets 1, 1-50. Black, F. and M. Scholes (1973): The pricing of options and corporate liabilities. Journal of Political Economy 81, 637-54. Borodin, A. N. and P. Salminen (1996): Handbook of Brownian Motion Facts and Formulae^ Birkhauser Verlag, Basel, Boston, Berlin.

Considering this particular trading strategy a European put option would not provide a perfect hedge. Imagine, for example a situation where S is hit at time r S, In this case the put would not be exercised at T, although the stop loss order had been executed. Only for r = T (which is a zero probability event) would the investor be indifferent between the two claims. One may argue that an American put option better meets the needs of an investor with a stop loss strategy than a European put, since the American put option could be exercised at any stopping time r

Wilmott (2000): The feedback effect of hedging in illiquid markets, SI AM Journal of Applied Mathematics 61(1), 232-72. Sircar, K. R. and G. Papanicolaou (1998): General Black-Scholes models accounting for increased market volatility from hedging strategies. Applied Mathematical Finance 5, 45-82. 1 Introduction This chapter analyzes optimal liquidation strategies for large security holdings. Order submission decisions are among the most important choices traders make. For many institutional investors (Uke insurance companies or pension funds) even a moderately sized position in a stock may represent a large fraction of this stock's daily trading volume.

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Strategic Trading in Illiquid Markets (Lecture Notes in Economics and Mathematical Systems) by Burkart Mönch

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