Timetable

Tuesdays and Thursdays, 16:30-18:00, TU FH, Turm A, 6. Stock, Seminarraum 107

Tu, 16.12.2003 Umut Cetin Trading in Illiquid Markets

Classical theories of financial markets assume infinitely liquid markets. We study an illiquid market where price paid/received depends on the size and the timing of the trade. The prices are not necessarily moved by a large trader. Dependency of the price on the trade size comes from the imbalance between the supply and the demand for the asset. Hence, classical models become a special case. We first find the self-financing condition in presence of illiquidities and see that the self-financing condition restricts the set of allowed trading strategies, i.e. not all predictable trading straegies can be used. We then study conditions for no arbitrage. Since the set of feasible strategies is shrunk and there is furthermore a liquidity cost, the market is no longer complete even if there exists a unique martingale measure for the "marginal price" of the asset. However, we can get an approximately complete market when the martingale measure is unique. In this incomplete market we study the problem of optimal investment.

© by Financial and Actuarial Mathematics, TU Vienna, 2002

For further details (including abstracts) see http://www.fam.tuwien.ac.at/events/