Scaling limits for super-replication with transient price impact

Peter Bank, Yan Dolinsky

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We prove a scaling limit theorem for the super-replication cost of options in a Cox-Ross-Rubinstein binomial model with transient price impact. The correct scaling turns out to keep the market depth parameter constant while resilience over fixed periods of time grows in inverse proportion with the duration between trading times. For vanilla options, the scaling limit is found to coincide with the one obtained by PDE-methods in (Math. Finance 22 (2012) 250-276) for models with purely temporary price impact. These models are a special case of our framework and so our probabilistic scaling limit argument allows one to expand the scope of the scaling limit result to path-dependent options.

Original languageAmerican English
Pages (from-to)2176-2201
Number of pages26
JournalBernoulli
Volume26
Issue number3
DOIs
StatePublished - Aug 2020

Bibliographical note

Publisher Copyright:
© 2020 ISI/BS

Keywords

  • Binomial model
  • Liquidity
  • Scaling limit
  • Super-replication
  • Transient price impact

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