IJPAM: Volume 105, No. 3 (2015)


Joseph Eyang'an Esekon
Department of Applied Science
Murang'a University College
P.O. Box 75-10200, Murang'a, KENYA

Abstract. We study a nonlinear Black-Scholes partial differential equation for modelling illiquid markets with feedback effects. After reducing the equation into a second-order nonlinear partial differential equation, we find that the assumption of a traveling wave profile to the second-order equation reduces it further to ordinary differential equations. Solutions to all these transformed equations facilitate an analytic solution to the nonlinear Black-Scholes equation. Use of the put-call parity gave rise to the put option's current value. These solutions can be used for pricing a European call and put options respectively at $t \geq 0$ and when $c \neq r$.

Received: June 6, 2015

AMS Subject Classification: 35K55, 91G20, 91G80

Key Words and Phrases: analytic solution, feedback effects, illiquid markets, transaction cost, price slippage, put-call parity

Download paper from here.

DOI: 10.12732/ijpam.v105i3.2 How to cite this paper?

International Journal of Pure and Applied Mathematics
ISSN printed version: 1311-8080
ISSN on-line version: 1314-3395
Year: 2015
Volume: 105
Issue: 3
Pages: 339 - 345

Google Scholar; DOI (International DOI Foundation); WorldCAT.

CC BY This work is licensed under the Creative Commons Attribution International License (CC BY).