Pricing options in illiquid markets: symmetry reductions and exact solutions

Rüdiger Frey, Ljudmila Bordag

Publikation: Beitrag in Buch/KonferenzbandBeitrag in Sammelwerk

Abstract

This chapter is concerned with nonlinear Black-Scholes equations arising in certain option pricing models with a large trader and/or transaction costs. In the first part we give an overview of existing option pricing models with frictions. While the financial setup differs between models, it turns out that in many of these models derivative prices can be characterized by fully nonlinear versions of the standard parabolic Black-Scholes PDE. In the second part of this chapter we study a typical nonlinear Black-Scholes equation using methods from Lie group analysis. The equation possesses a rich symmetry group. By introducing invariant variables, invariant solutions can therefore be characterized in terms of solutions to ordinary differential equations. Finally we discuss properties and applications of these solutions.
OriginalspracheEnglisch
Titel des SammelwerksNonlinear Models in Mathematical Finance New Research Trends in Option Pricing
Herausgeber*innen Matthias Ehrhardt
ErscheinungsortNew York
VerlagNova Science Publishers, Inc.
Seiten103 - 129
PublikationsstatusVeröffentlicht - 1 Mai 2009

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