Our objective is to study liquidity risk, in particular the so-called “bid-ask spread”, as a by-product of market uncertainties. “Bid-ask spread”, and more generally “limit order books” describe the existence of different sell and buy prices, which we explain by using different risk aversions of market participants. The risky asset follows a diffusion process governed by a Brow- nian motion which is uncertain. We use the error theory with Dirichlet forms to formalize the notion of uncertainty on the Brownian motion. This uncer- tainty generates noises on the trajectories of the underlying asset and we use these noises to expound the presence of bid-ask spreads. In addition, we prove that these noises also have direct impacts on the mid-price of the risky asset. We further enrich our studies with the resolution of an optimal liquidation problem under these liquidity uncertainties and market impacts. To complete our analysis, some numerical results will be provided.

Bid-Ask Spread Modelling, a Perturbation Approach

SCOTTI S
2013

Abstract

Our objective is to study liquidity risk, in particular the so-called “bid-ask spread”, as a by-product of market uncertainties. “Bid-ask spread”, and more generally “limit order books” describe the existence of different sell and buy prices, which we explain by using different risk aversions of market participants. The risky asset follows a diffusion process governed by a Brow- nian motion which is uncertain. We use the error theory with Dirichlet forms to formalize the notion of uncertainty on the Brownian motion. This uncer- tainty generates noises on the trajectories of the underlying asset and we use these noises to expound the presence of bid-ask spreads. In addition, we prove that these noises also have direct impacts on the mid-price of the risky asset. We further enrich our studies with the resolution of an optimal liquidation problem under these liquidity uncertainties and market impacts. To complete our analysis, some numerical results will be provided.
Lim, T; LY VATH, V; Sahut, J M; Scotti, S
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11568/1133479
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