Preprints, Working Papers, ... Year : 2024

Pricing and hedging for a sticky diffusion

Abstract

We introduce a financial market model featuring a risky asset whose price follows a sticky geometric Brownian motion and a riskless asset that grows with a constant interest rate $r\in \mathbb R $. We prove that this model satisfies No Arbitrage (NA) and No Free Lunch with Vanishing Risk (NFLVR) only when $r=0 $. Under this condition, we derive the corresponding arbitrage-free pricing equation, assess replicability and representation of the replication strategy. We then show that all locally bounded replicable payoffs for the standard Black--Scholes model are also replicable for the sticky model. Last, we evaluate via numerical experiments the impact of hedging in discrete time and of misrepresenting price stickiness.
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hal-04756051 , version 1 (28-10-2024)

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Alexis Anagnostakis. Pricing and hedging for a sticky diffusion. 2024. ⟨hal-04756051⟩
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