On derivatives with illiquid underlying and market manipulation

Quantitative Finance

Volumn 11, Issue 7, 2011, Pages 1051-1066

  Horst, Ulrich ^a   Naujokat, Felix ^a  

^a HUMBOLDT UNIVERSITY   (Germany)

Author keywords

Derivatives pricing; Game theory; Liquidity modelling; Market manipulation; Stochastic models

Indexed keywords

EID: 79960657729     PISSN: 14697688     EISSN: 14697696     Source Type: Journal    
DOI: 10.1080/14697688.2011.552517     Document Type: Article

References (39)

1. Alfonsi, A., Fruth, A. and Schied, A., Optimal execution strategies in limit order books with general shape functions. Quant. Finance, 2010, 10(2), 143-157.
2. Allen, F. and Gale, D., Stock-price manipulation. Rev. Financial Stud., 1992, 5, 503-529.
3. Almgren, R., Optimal execution with nonlinear impact functions and trading-enhanced risk. Appl. Math. Finance, 2003, 10(1), 1-18.
4. Almgren, R. and Chriss, N., Optimal execution of portfolio transactions. J. Risk, 2001, 3, 5-39.
5. Almgren, R. and Lorenz, J., Adaptive arrival price. In Algorithmic Trading III: Precision, Control, Execution, 2007.
6. Almgren, R., Thum, C., Hauptmann, E. and Li, H., Direct estimation of equity market impact. Risk, 2005, 18(7), 58-62.
7. Back, K., Insider trading in continuous time. Rev. Financial Stud., 1992, 5, 387-410.
8. Back, K., Cao, H. and Willard, G., Imperfect competition among informed traders. J. Finance, 2000, 55, 2117-2155.
9. Brunnermeier, M. and Pedersen, L., Predatory trading. J. Finance, 2005, 60(4), 1825-1863.
10. Buckdahn, R., Cardaliaguet, P. and Rainer, C., Nash equilibrium payoffs for nonzero-sum stochastic differential games. SIAM J. Control Optimiz., 2004, 43(2), 624-642.
11. Buckdahn, R. and Li, J., Stochastic differential games and viscosity solutions of Hamilton-Jacobi-Bellman-Isaacs equations. SIAM J. Control Optimiz., 2008, 47(1), 444-475.
12. Carlin, B.I., Lobo, M.S. and Viswanathan, S., Episodic liquidity crises: Cooperative and predatory trading. J. Finance, 2007, 65(5), 2235-2274.
13. Çetin, U., Jarrow, R. and Protter, P., Liquidity risk and arbitrage pricing theory. Finance Stochast., 2004, 8(3), 311-341.
14. Chau, M. and Vayanos, D., Strong-form efficiency with monopolistic insiders. Rev. Financial Stud., 2008, 21, 2275-2306.
15. Cheridito, P., Horst, U., Kupper, M. and Pirvu, T., Equilibrium pricing in incomlete markets under translation invariant preferences. Preprint, 2009.
16. Dutt, H.R. and Harris, L.E., Position limits for cash-settled derivative contracts. J. Fut. Mkts, 2005, 25(10), 945-965.
17. Fleming, W.H. and Soner, H.M., Controlled Markov Processes and Viscosity Solutions, 1993 (Springer: New York).
18. Foster, F.D. and Viswanathan, S., Strategic trading with when agents forecast the forecasts of others. J. Finance, 1996, 51, 1437-1478.
19. Friedman, A., Stochastic differential games. J. Different. Eqns, 1972, 11, 79-108.
20. Gallmeyer, M. and Seppi, D., Derivative security induced price manipulation. Working Paper, Carnegie Mellon University, 2000.
21. Garbade, K. and Silber, W., Cash settlement of futures contracts: An economic analysis. J. Fut. Mkts, 1983, 3, 451-472.
22. Hamadène, S. and Lepeltier, J.P., Zero-sum stochastic differential games and backward equations. Syst. Control Lett., 1995, 24, 259-263.
23. Huberman, G. and Stanzl, W., Price manipulation and quasiarbitrage. Econometrica, 2004, 72(4), 1247-1275.
24. Jarrow, R., Derivative security markets, market manipulation, and option pricing theory. J. Financial Quant. Anal., 1994, 29(2), 241-261.
25. Kraft, H. and Kúhn, C., Large traders and illiquid options: Hedging vs. manipulation. Working Paper, 2009.
26. Kumar, P. and Seppi, D., Futures manipulation with cash settlement. J. Finance, 1992, 47(4), 1485-1502.
27. Kyle, A.S., Continuous auctions and insider trading. Econometrica, 1985, 53(6), 1315-1335.
28. Kyle, A.S. and Viswanathan, S., How to define illegal price manipulation. Am. Econ. Rev., 2008, 98, 274-279.
29. Ladyzenskaja, O.A., Solonnikov, V.A. and Ural'ceva, N.N., Linear and Quasi-linear Equations of Parabolic Type, 1968 (American Mathematical Society: Providence, RI).
30. Nisio, M., Stochastic differential games and viscosity solutions of Isaacs equations. Nagoya Math. J., 1988, 110, 163-184.
31. Obizhaeva, A. and Wang, J., Optimal trading strategy and supply/demand dynamics. Working Paper, 2005.
32. Pirrong, C., Manipulation of cash-settled futures contracts. J. Business, 2001, 74(2), 221-244.
33. Rogers, L.C.G. and Singh, S., The cost of illiquidity and its effects on hedging. Math. Finance, 2010, 20(4), 597-615.
34. Rosencrans, S.I., Derivation of the Hopf-Cole solution to Burgers' equation by stochastic integrals. Proc. Am. Math. Soc., 1972, 32, 147-149.
35. Schied, A. and Schóneborn, T., Liquidation in the face of adversity: Stealth vs. sunshine trading, predatory trading vs. liquidity provision. Working Paper, 2007.
36. Schied, A. and Schöneborn, T., Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets. Finance Stochast., 2008, 13(2), 181-204.
37. Schönbucher, P. and Wilmott, P., The feedback effect of hedging in illiquid markets. SIAM J. Appl. Math., 2000, 61, 232-272.
38. Taylor, M.E., Partial Differential Equations. III. Nonlinear Equations, 1997 (Springer: New York).
39. Vanden, J.M., Digital contracts and price manipulation. J. Business, 2005, 78(5), 1891-1916.