Author： Matsumoto Koichi
Publisher： Routledge Ltd
ISSN： 1466-4313
Source： Applied Mathematical Finance, Vol.20, Iss.2, 2013-04, pp. : 167-190
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Abstract
This article studies a replication of a contingent claim in an illiquid market. We represent the liquidity as a supply curve in a discrete time model. Because the trade price of the illiquid asset is a function of the trade size in this model, it is important whether the contingent claim is physically settled or settled in cash. In both cases, we give a condition where a replication strategy exists uniquely and show some properties of the replication strategy. Further we analyse the liquidity cost numerically.
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