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Binomial market for Cetin-Jarrow-Protter model of liquidity
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When
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5.15 on Thursday 26th November 2009
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Where
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B617, Leverhulme Library, Columbia House
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Presentations
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Speaker
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Selim Gokay
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From
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ETH Zurich
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Abstract
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We study the Binomial version of the illiquid market model introduced by Cetin, Jarrow and Protter for continuous-time. In particular, we investigate the liquidity premium that results from the model. Cetin, Jarrow and Protter showed that the arbitrage-free price of a European contingent claim is equal to the Black-Scholes value. Later, Cetin, Soner and Touzi considered the super-replication problem using the same supply curve model but under some restrictions on the trading strategies. They showed that there exists a liquidity premium, a difference between the super-replicating cost and the Black-Scholes value. We analyze the super-replication problem in discrete time without any assumptions on the trading strategies. We recover the same liquidity premium as in Cetin, Soner and Touzi by passing to the continuous-time limit. We also develop efficient numerical methods for the analysis of this model. (joint work with Mete Soner)
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For further information
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Sabina Allam (Postgraduate Administrator) Ext. 6879
Department of Statistics, Columbia House
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