Yang, Jinqiang; Yang, Zhaojun - In: Quantitative Finance 13 (2012) 7, pp. 1029-1039
This paper derives two pricing PDEs for a general European option under liquidity risk. We provide two modified hedges: one hedge replicates a short option and the other replicates a long option inclusive of liquidity costs under continuous rebalancing. We identify an arbitrage-free interval by...