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Liquidity costs: a new numerical methodology and an empirical study

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  • Christophe Michel
  • Victor Reutenauer
  • Denis Talay
  • Etienne Tanr'e

Abstract

We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit strategy optimizing an expected function of the hedging error. We here propose an efficient algorithm based on the stochastic gradient method to compute an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numerical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost.

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  • Christophe Michel & Victor Reutenauer & Denis Talay & Etienne Tanr'e, 2015. "Liquidity costs: a new numerical methodology and an empirical study," Papers 1501.07404, arXiv.org, revised Dec 2015.
    • Handle: RePEc:arx:papers:1501.07404
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    References listed on IDEAS

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    3. Lelong, Jérôme, 2008. "Almost sure convergence of randomly truncated stochastic algorithms under verifiable conditions," Statistics & Probability Letters, Elsevier, vol. 78(16), pages 2632-2636, November.
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