Pricing and Hedging in Illiquid Financial Markets

  • Date: 03/15/2007

Peter Bank (Columbia University)


University of British Columbia


Ever since the seminal work of Black, Scholes, and Merton, typical
models studied in Mathematical Finance specify price dynamics
exogenously via some more or less explicit semimartingale dynamics.
This is in contrast to the basic economic paradigm that prices ought to
be determined by demand and supply. We propose a new model which
bridges the gap (or at least tries to) between these two approaches by
studying the dynamics of utility indifference prices. For exponential
utility, the resulting nonlinear wealth dynamics allow for explicit
solutions to the classical problems of pricing, hedging, and utility
maximization in complete and incomplete financial markets. We shall
also show how these results extend tho general utilities. This talk is
based on joint work with Dmitry Kramkov and Jeffrey Said.

Other Information: 

MITACS Math Finance Seminar 2007