IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp1672.html
   My bibliography  Save this paper

Hedging with Temporary Price Impact

Author

Listed:
  • Peter Bank

    (Humboldt University of Berlin)

  • Halil Mete Soner

    (ETH Zurich and Swiss Finance Institute)

  • Moritz Voss

    (Technische Universität Berlin (TU Berlin))

Abstract

We consider the problem of hedging a European contingent claim in a Bachelier model with transient price impact as proposed by Almgren and Chriss. Following the approach of Rogers and Singh [24] and Naujokat and Westray, the hedging problem can be regarded as a cost optimal tracking problem of the frictionless hedging strategy. We solve this problem explicitly for general predictable target hedging strategies. It turns out that, rather than towards the current target position, the optimal policy trades towards a weighted average of expected future target positions. This generalizes an observation of Gârleanu and Pedersen from their homogenous Markovian optimal investment problem to a general hedging problem. Our findings complement a number of previous studies in the literature on optimal strategies in illiquid markets as, where the frictionless hedging strategy is confined to diffusions. The consideration of general predictable reference strategies is made possible by the use of a convex analysis approach instead of the more common dynamic programming methods.

Suggested Citation

  • Peter Bank & Halil Mete Soner & Moritz Voss, 2016. "Hedging with Temporary Price Impact," Swiss Finance Institute Research Paper Series 16-72, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1672
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881299
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew Papanicolaou & Shiva Chandra, 2019. "Singular Perturbation Expansion for Utility Maximization with Order-$\epsilon$ Quadratic Transaction Costs," Papers 1910.06463, arXiv.org, revised Mar 2023.
    2. Dirk Becherer & Todor Bilarev, 2018. "Hedging with physical or cash settlement under transient multiplicative price impact," Papers 1807.05917, arXiv.org, revised Jun 2023.

    More about this item

    Keywords

    Hedging; illiquid markets; portfolio tracking;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp1672. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.