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Option Pricing in the Presence of Liquidity Risk

<p>The main objective of this paper is to prove that liquidity costs do exist in option pricingtheory. To achieve this goal, a martingale approach to option pricing theory is usedand, from a model by Jarrow and Protter [JP], a sound theoretical model is derived toshow that liquidity risk exists. This model, derived and tested in this extended theory,allows for liquidity costs to arise. The expression liquidity cost is used in this paper tomeasure liquidity risk relative to the option price.</p>

Identiferoai:union.ndltd.org:UPSALLA/oai:DiVA.org:umu-35100
Date January 2010
CreatorsHarr, Martin
PublisherUmeƄ University, Department of Physics
Source SetsDiVA Archive at Upsalla University
LanguageEnglish
Detected LanguageEnglish
TypeStudent thesis, text

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