Publication: Discrete-time option pricing with stochastic liquidity
Discrete-time option pricing with stochastic liquidity
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Leippold, M., & Schärer, S. (2017). Discrete-time option pricing with stochastic liquidity. Journal of Banking and Finance, 75, 1–16. https://doi.org/10.1016/j.jbankfin.2016.11.014
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Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity that may contribute to significant bid-ask spreads. Within the framework of conic finance, we develop a stochastic liquidity model, extending the discrete-time constant liquidity model of Madan (2010). With this extension, we can replicate the term and skew structures of bid-ask spreads typically observed in option markets. We show how to implement such a stochastic liquidity model within our framework using multidime
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- Schärer, Steven
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Leippold, M., & Schärer, S. (2017). Discrete-time option pricing with stochastic liquidity. Journal of Banking and Finance, 75, 1–16. https://doi.org/10.1016/j.jbankfin.2016.11.014
