Option Pricing in the Presence of Liquidity Risk
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
The main objective of this paper is to prove that liquidity costs do exist in option pricingtheory. To achieve this goal, a martingale approach to option pricing theory is usedand, from a model by Jarrow and Protter [JP], a sound theoretical model is derived toshow that liquidity risk exists. This model, derived and tested in this extended theory,allows for liquidity costs to arise. The expression liquidity cost is used in this paper tomeasure liquidity risk relative to the option price.
Place, publisher, year, edition, pages
liquidity risk, liquidity costs, option theory, supply curve, martingale approach in option pricing
IdentifiersURN: urn:nbn:se:umu:diva-35100OAI: oai:DiVA.org:umu-35100DiVA: diva2:329286
UppsokPhysics, Chemistry, Mathematics