Option pricing in high volatile markets with illiquidity

摘要

This paper deals with the valuation of options in markets without liquidity and under stress. More precisely, a European option is considered when the underlying asset's dynamic is governed by a Brownian motion. Following Liu and Yong [1], a term related to the number of invested stock is embedded into the model. Moreover, the volatility of the asset is augmented by a separate function that models the abnormal increase of the volatility. Under these settings, we deal with the evaluation of European options.