Tug-of-war, market manipulation and option pricing
We develop an option pricing model based on a tug-of-war game. This two-player zero-sum stochastic differential game is formulated in the context of a multi-dimensional financial market. The issuer and the holder try to manipulate asset price processes in order to minimize and maximize the expected discounted reward. We prove that the game has a value and that the value function is the unique viscosity solution to a terminal value problem for a parabolic partial differential equation involving the non-linear and completely degenerate infinity Laplace operator.
Year of publication: |
2014-10
|
---|---|
Authors: | Kaj Nystr\"om ; Parviainen, Mikko |
Institutions: | arXiv.org |
Saved in:
freely available
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