TUG‐OF‐WAR,MARKET MANIPULATION,AND OPTION PRICING |
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Authors: | Kaj Nyström Mikko Parviainen |
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Affiliation: | 1. Uppsala University;2. University of Jyv?skyl? |
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Abstract: | We develop an option pricing model based on a tug‐of‐war game. This two‐player zero‐sum stochastic differential game is formulated in the context of a multidimensional financial market. The issuer and the holder try to manipulate asset price processes in order to minimize and maximize the expected discounted reward. We prove that the game has a value and that the value function is the unique viscosity solution to a terminal value problem for a parabolic partial differential equation involving the nonlinear and completely degenerate infinity Laplace operator. |
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Keywords: | infinity Laplace nonlinear parabolic partial differential equation option pricing stochastic differential game tug‐of‐war |
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