A model for a large investor trading at market indifference prices. II: continuous-time case

Details A model for a large investor trading at market indifference prices. II: continuous-time case A model for a large investor trading at market indifference prices. II: continuous-time case

2011-10-14

arxiv.org/abs/1110.3229v2

Economy

Quantitative Finance

Trading and Market Microstructure

57 pages. Keywords: Bertrand competition, contingent claims, equilibrium, indifference prices, liquidity, large investor, Pare

Scientific paper

We develop a continuous-time model for a large investor trading at market indifference prices. In analogy to the construction of stochastic integrals, we investigate the transition from simple to general predictable strategies. A key role is played by a stochastic differential equation for the market makers' utility process. The analysis of this equation relies on conjugacy relations between the stochastic processes with values in the spaces of saddle functions associated with the representative agent's utility.

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