How Option Hedging Shapes Market Impact
| Autor: | Emilio Said |
|---|---|
| Přispěvatelé: | Chaire de finance quantitative (FiQuant), Mathématiques et Informatique pour la Complexité et les Systèmes (MICS), CentraleSupélec-CentraleSupélec, CentraleSupélec |
| Jazyk: | angličtina |
| Rok vydání: | 2019 |
| Předmět: |
Stylized fact
050208 finance Quantitative Finance - Trading and Market Microstructure Market microstructure Option pricing 05 social sciences Metaorders execution Trading and Market Microstructure (q-fin.TR) Market impact FOS: Economics and business Empirical research Discrete time and continuous time Valuation of options 0502 economics and business Fair pricing Econometrics Economics Option hedging Arbitrage Relaxation (approximation) 050207 economics [QFIN.TR]Quantitative Finance [q-fin]/Trading and Market Microstructure [q-fin.TR] Metaorders relaxation |
| Popis: | We present a perturbation theory of the market impact based on an extension of the framework proposed by [Loeper, 2018] -- originally based on [Liu and Yong, 2005] -- in which we consider only local linear market impact. We study the execution process of hedging derivatives and show how these hedging metaorders can explain some stylized facts observed in the empirical market impact literature. As we are interested in the execution process of hedging we will establish that the arbitrage opportunities that exist in the discrete time setting vanish when the trading frequency goes to infinity letting us to derive a pricing equation. Furthermore our approach retrieves several results already established in the option pricing literature such that the spot dynamics modified by the market impact. We also study the relaxation of our hedging metaorders based on the fair pricing hypothesis and establish a relation between the immediate impact and the permanent impact which is in agreement with recent empirical studies on the subject. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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