Publication: Nonconvex optimization for pricing and hedging in imperfect markets
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2006-07
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Elsevier
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Abstract
The paper deals with imperfect financial markets and provides new methods to overcome
many inefficiencies caused by frictions. Transaction costs are quite general and far from linear
or convexo The concepts of pseudoarbitrage and efficiency are introduced and deeply analyzed by
means of both scalar and vector optimization problems. Their optimality conditions and solutions
yield strategies to invest and hedging portfolios, as well as bid-ask spread improvements. They also
point out the role of coalitions when dealing with these markets. Several sensitivity results will permit
us to show that a significant transaction costs reduction is very often feasible in practice, as well as to
measure its effect on the general efficiency of the market. AII these findings may be especially important
for many emerging and still illiquid spot or derivative markets (electricity markets, com odity
markets, markets related to weather, infiation-linked or insurance-linked derivatives, etc.).
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Keywords
Global optimization, Pseudoarbitrage, Spread reduction, Balance point
Bibliographic citation
Computers & Mathematics with Applications, 2006, v. 52, nº 1-2, pp. 121-136