On option pricing in the large risk aversion, small transaction cost limit

Details On option pricing in the large risk aversion, small transaction cost limit On option pricing in the large risk aversion, small transaction cost limit

2011-02-17

arxiv.org/abs/1102.3516v2

Mathematics

Analysis of PDEs

Scientific paper

We characterize the price of a European option on several assets for a very risk averse seller, in a market with small transaction costs as a solution of a nonlinear diffusion equation. This problem turns out to be one of asymptotic analysis of nonlinear parabolic PDE, and the interesting feature is the role of a nonlinear PDE eigenvalue problem. In particular, we generalize previous work of G. Barles and H. Soner who studied this problem for a European call option on a single asset where the associated eigenvalue problem involves an ODE with an explicit solution.

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