Liquidity costs: a new numerical methodology and an empirical study - Inria - Institut national de recherche en sciences et technologies du numérique
Journal Articles Applied Mathematical Finance Year : 2016

Liquidity costs: a new numerical methodology and an empirical study

Abstract

We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit optimal strategy minimizing a risk measure of the hedging error. We here propose an efficient algorithm, based on the stochas-tic gradient method, to obtain an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numer-ical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost.
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Dates and versions

hal-01098096 , version 1 (22-12-2014)
hal-01098096 , version 2 (02-02-2015)
hal-01098096 , version 3 (23-12-2015)

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Christophe Michel, Victor Reutenauer, Denis Talay, Etienne Tanré. Liquidity costs: a new numerical methodology and an empirical study. Applied Mathematical Finance, 2016, ⟨10.1080/1350486X.2016.1164608⟩. ⟨hal-01098096v3⟩
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