Derivatives pricing with liquidity risk
Zhang, Y; Ding, S; Duygun, Meryem
MERYEM DUYGUN Meryem.Duygun@nottingham.ac.uk
Aviva Chair in Risk and Insurance
This paper develops a novel, general derivative pricing model which introduces a liquidity risk factor. The model variants we outline offer a sufficient degree of flexibility so as to enable the valuation of various types of derivative classes including futures, American options, and MBS options, while existing derivative models can only price liquidity risk in European derivatives. We validate the model with oil and gold futures data and compare it to a classical benchmark model void of any liquidity risk. We find that our model is significantly more accurate than the classical model for pricing both oil and gold contracts.
|Journal Article Type||Article|
|Journal||Journal of Futures Markets|
|Peer Reviewed||Peer Reviewed|
|APA6 Citation||Zhang, Y., Ding, S., & Duygun, M. (2019). Derivatives pricing with liquidity risk. Journal of Futures Markets, https://doi.org/10.1002/fut.22008|
|Keywords||Derivative Pricing, Liquidity Risk Factor, Futures Contracts|
|Additional Information||This is the peer reviewed version of the following article: Zhang, Y, Ding, S, Duygun, M. Derivatives pricing with liquidity risk. J Futures Markets. 2019; 1– 15, which has been published in final form at https://doi.org/10.1002/fut.22008. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.|
This file is under embargo until Apr 2, 2021 due to copyright restrictions.
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