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Market indifference prices and illiquidity

Peter Bank

Market indifference prices and illiquidity (joint work with Dmitry Kramkov, Carnegie Mellon and Oxford Universities)

We study a nonlinear financial model where a ’large’ investor submits his orders to a number of market makers. The quoted prices are determined by the unique Pareto optimal allocation which fills the order and leaves each market makers’ utility unchanged. We show how these market indifference prices can be described as the unique solution to a nonlinear SDE and discuss some implications for pricing and hedging of derivatives from the point of view of the large trader.


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