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Derivatives pricing with liquidity risk

Zhang, Y; Ding, S; Duygun, Meryem

Authors

Y Zhang

S Ding

MERYEM DUYGUN Meryem.Duygun@nottingham.ac.uk
Aviva Chair in Risk and Insurance



Abstract

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
Publication Date 2019-11
Journal Journal of Futures Markets
Print ISSN 0270-7314
Electronic ISSN 1096-9934
Publisher Wiley
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
DOI https://doi.org/10.1002/fut.22008
Keywords Derivative Pricing, Liquidity Risk Factor, Futures Contracts
Publisher URL https://onlinelibrary.wiley.com/doi/full/10.1002/fut.22008
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.
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