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Option Pricing in the Presence of Liquidity Risk
Umeå University, Faculty of Science and Technology, Department of Physics.
2010 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

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
Keyword [en]
liquidity risk, liquidity costs, option theory, supply curve, martingale approach in option pricing
URN: urn:nbn:se:umu:diva-35100OAI: diva2:329286
Physics, Chemistry, Mathematics
Available from: 2010-07-27 Created: 2010-07-09 Last updated: 2010-07-27Bibliographically approved

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