Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity … liquidity model, extending the discrete-time constant liquidity model of Madan (2010). With this extension, we can replicate the … stochastic liquidity model within our framework using multidimensional binomial trees and we calibrate it to call and put options …

It is well established that investors price market liquidity risk. Yet, there exists no financial claim contingent on … liquidity. We propose a contract to hedge uncertainty over future transaction costs, detailing potential buyers and sellers …. Introducing liquidity derivatives in Brunnermeier and Pedersen (2009) improves financial stability by mitigating liquidity spirals …