Frey, Rüdiger, Bordag, Ljudmila. 2009. Pricing options in illiquid markets: symmetry reductions and exact solutions. In: Nonlinear Models in Mathematical Finance
New Research Trends in Option Pricing, Hrsg. Matthias Ehrhardt, 103-129. New York: Nova Science Publishers.
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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.
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Status of publication | Published |
---|---|
Affiliation | WU |
Type of publication | Chapter in edited volume |
Language | English |
Title | Pricing options in illiquid markets: symmetry reductions and exact solutions |
Title of whole publication | Nonlinear Models in Mathematical Finance New Research Trends in Option Pricing |
Editor | Matthias Ehrhardt |
Page from | 103 |
Page to | 129 |
Location | New York |
Publisher | Nova Science Publishers |
Year | 2009 |
URL | http://www.math.tu-berlin.de/~ehrhardt/Projects/black-scholes-book.html |
Associations
- People
- Frey, Rüdiger (Details)
- External
- Bordag, Ljudmila
- Organization
- Institute for Statistics and Mathematics IN (Details)