Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Request a Demo
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Derivatives
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Request a Demo
  • Log in
The Journal of Derivatives

The Journal of Derivatives

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JOD
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

Hedging Through a Limit Order Book with Varying Liquidity

Rossella Agliardi and Ramazan Gençay
The Journal of Derivatives Winter 2014, 22 (2) 32-49; DOI: https://doi.org/10.3905/jod.2014.22.2.032
Rossella Agliardi
is an associate professor in the Department of Mathematics at the University of Bologna and IMATI- CNR in Pavia, Italy.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: rossella.agliardi@unibo.it
Ramazan Gençay
is a professor in the Department of Economics at Simon Fraser University in Burnaby, British Columbia, Canada, and a senior fellow at the Rimini Center for Economic Analysis in Rimini, Italy.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: rgencay@sfu.ca
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.

Don’t have access? Click here to request a demo 

Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600

Abstract

Market impact is one of the most important aspects of real-world trading. It is typically a major component of transaction costs, and trading strategies are carefully optimized to minimize it. But most of the research has focused on one-off trades, not the repeated series of transactions required in delta-hedging an options position. In this article, the authors explore optimal hedging in an illiquid environment for a large trader whose trades absorb a nonmarginal fraction of the standing orders in the limit order book. The trader needs to take account of both the immediate price impact of each trade and the speed at which the limit order book is restored afterward—the market’s resilience. These two aspects of market dynamics together can produce a permanent effect of a big trade and also a temporary one that dissipates over time. Depending on the parameters of the liquidity process, the optimal strategy can be the canonical Black–Scholes delta hedge (in the limiting case of infinite liquidity) or one that is distinctly less volatile (when market impact is large, but there is some resilience in prices) or even one that entails price manipulation (when there is no resilience and the price impact is permanent).

TOPICS: Derivatives, quantitative methods

  • © 2014 Institutional Investor, Inc.
View Full Text

Don’t have access? Click here to request a demo

Alternatively, Call a member of the team to discuss membership options

US and Overseas: +1 646-931-9045

UK: 0207 139 1600

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Derivatives: 22 (2)
The Journal of Derivatives
Vol. 22, Issue 2
Winter 2014
  • Table of Contents
  • Index by author
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Derivatives.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
Hedging Through a Limit Order Book with Varying Liquidity
(Your Name) has sent you a message from The Journal of Derivatives
(Your Name) thought you would like to see the The Journal of Derivatives web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
Hedging Through a Limit Order Book with Varying Liquidity
Rossella Agliardi, Ramazan Gençay
The Journal of Derivatives Nov 2014, 22 (2) 32-49; DOI: 10.3905/jod.2014.22.2.032

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
Hedging Through a Limit Order Book with Varying Liquidity
Rossella Agliardi, Ramazan Gençay
The Journal of Derivatives Nov 2014, 22 (2) 32-49; DOI: 10.3905/jod.2014.22.2.032
del.icio.us logo Digg logo Reddit logo Twitter logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • THE SETUP
    • HEDGING UNDER A PERFECTLY RESILIENT MARKET
    • HEDGING WITH PRICE IMPACT AND RESILIENCE
    • FURTHER REMARKS AND POSSIBLE EXTENSIONS
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

Similar Articles

Cited By...

  • No citing articles found.
  • Google Scholar
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
pm-research@pageantmedia.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • Home
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Log In
  • Update your profile
  • Give us your feedback

© 2022 Pageant Media Ltd | All Rights Reserved | ISSN: 1074-1240 | E-ISSN: 2168-8524

  • Site Map
  • Terms & Conditions
  • Privacy Policy
  • Cookies