Optimal investment and contingent claim valuation in illiquid markets

Teemu Pennanen

doi:10.1007/s00780-014-0240-0

Optimal investment and contingent claim valuation in illiquid markets

Teemu Pennanen^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

19 Citations (Scopus)

Abstract

This paper extends basic results on arbitrage bounds and attainable claims to illiquid markets and general swap contracts where both claims and premiums may have multiple payout dates. Explicit consideration of swap contracts is essential in illiquid markets where the valuation of swaps cannot be reduced to the valuation of cumulative claims at maturity. We establish the existence of optimal trading strategies and the lower semicontinuity of the optimal value of optimal investment under conditions that extend the no-arbitrage condition in the classical linear market model. All results are derived with the "direct method" without resorting to duality arguments.

Original language	English
Pages (from-to)	733-754
Number of pages	22
Journal	Finance and Stochastics
Volume	18
Issue number	4
Early online date	1 Aug 2014
DOIs	https://doi.org/10.1007/s00780-014-0240-0
Publication status	Published - Oct 2014

Keywords

Illiquidity
Optimal investment
Reserving
Indifference pricing
Swap contracts
FINITE DISCRETE-TIME
TRANSACTION COSTS
INCOMPLETE MARKETS
UTILITY MAXIMIZATION
FUNDAMENTAL THEOREM
RISK
SEMIMARTINGALES
CONSTRAINTS
DUALITY
PRICE

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title = "Optimal investment and contingent claim valuation in illiquid markets",

abstract = "This paper extends basic results on arbitrage bounds and attainable claims to illiquid markets and general swap contracts where both claims and premiums may have multiple payout dates. Explicit consideration of swap contracts is essential in illiquid markets where the valuation of swaps cannot be reduced to the valuation of cumulative claims at maturity. We establish the existence of optimal trading strategies and the lower semicontinuity of the optimal value of optimal investment under conditions that extend the no-arbitrage condition in the classical linear market model. All results are derived with the {"}direct method{"} without resorting to duality arguments.",

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author = "Teemu Pennanen",

year = "2014",

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doi = "10.1007/s00780-014-0240-0",

language = "English",

volume = "18",

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journal = "Finance and Stochastics",

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T1 - Optimal investment and contingent claim valuation in illiquid markets

AU - Pennanen, Teemu

PY - 2014/10

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N2 - This paper extends basic results on arbitrage bounds and attainable claims to illiquid markets and general swap contracts where both claims and premiums may have multiple payout dates. Explicit consideration of swap contracts is essential in illiquid markets where the valuation of swaps cannot be reduced to the valuation of cumulative claims at maturity. We establish the existence of optimal trading strategies and the lower semicontinuity of the optimal value of optimal investment under conditions that extend the no-arbitrage condition in the classical linear market model. All results are derived with the "direct method" without resorting to duality arguments.

AB - This paper extends basic results on arbitrage bounds and attainable claims to illiquid markets and general swap contracts where both claims and premiums may have multiple payout dates. Explicit consideration of swap contracts is essential in illiquid markets where the valuation of swaps cannot be reduced to the valuation of cumulative claims at maturity. We establish the existence of optimal trading strategies and the lower semicontinuity of the optimal value of optimal investment under conditions that extend the no-arbitrage condition in the classical linear market model. All results are derived with the "direct method" without resorting to duality arguments.

KW - Illiquidity

KW - Optimal investment

KW - Reserving

KW - Indifference pricing

KW - Swap contracts

KW - FINITE DISCRETE-TIME

KW - TRANSACTION COSTS

KW - INCOMPLETE MARKETS

KW - UTILITY MAXIMIZATION

KW - FUNDAMENTAL THEOREM

KW - RISK

KW - SEMIMARTINGALES

KW - CONSTRAINTS

KW - DUALITY

KW - PRICE

U2 - 10.1007/s00780-014-0240-0

DO - 10.1007/s00780-014-0240-0

M3 - Article

SN - 0949-2984

VL - 18

SP - 733

EP - 754

JO - Finance and Stochastics

JF - Finance and Stochastics

IS - 4

ER -

Optimal investment and contingent claim valuation in illiquid markets

Abstract

Keywords

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