Price dynamics and valuation of contingent assets in markets with liquidity risk
Dinámica de precios y valoración de activos contingentes en mercados con riesgo de liquidez
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Abstract
Market models are considered in which a liquidity factor associated with price dynamics and the agents’ trading strategies is incorporated. The case is stud-ied in which the liquidity factor is a deterministic function of the price and another in which this factor is stochastic described by a Cox-Ingersoll-Ross process. Different types of trading strategies are considered and the stochastic differential equations for price dynamics as well as the corresponding non-linear partial differential equations for the valuation of contingent assets are explicitly established
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