A system of quadratic BSDEs arising in a price impact model
arXiv:1408.0916 · doi:10.1214/15-AAP1103
Abstract
We consider a financial model where the prices of risky assets are quoted by a representative market maker who takes into account an exogenous demand. We characterize these prices in terms of a system of BSDEs with quadratic growth. We show that this system admits a unique solution for every bounded demand if and only if the market maker's risk-aversion is sufficiently small. The uniqueness is established in the natural class of solutions, without any additional norm restrictions. To the best of our knowledge, this is the first study that proves such (global) uniqueness result for a system of fully coupled quadratic BSDEs.
Published at http://dx.doi.org/10.1214/15-AAP1103 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)