Illiquidity and Derivative Valuation

Ulrich Horst & Felix Naujokat
In illiquid markets, option traders may have an incentive to increase their portfolio value by using their impact on the dynamics of the underlying. We provide a mathematical framework within which to value derivatives under market impact in a multi-player framework by introducing strategic interactions into the model of Almgren and Chriss (2001). Specifically, we consider a financial market model with several strategically interacting players that hold European contingent claims and whose trading decisions have...
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