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A closed-form pricing formula for European options in an illiquid asset market | SpringerLink
Source: link.springer.com
Article summary:
1. The Black-Scholes model is inadequate to describe real markets due to its assumption of perfect liquidity.
2. There is no consensus on the definition of liquidity risk, and research into its effects on derivative pricing is still in its infancy.
3. A market-wide liquidity based discounting factor has been proposed by Brunetti and Caldarera (2004) and Feng et al. (2014) to investigate the impact of liquidity risk on derivative prices.
Article analysis:
The article provides a comprehensive overview of the current state of research into the effects of liquidity risk on derivative pricing, as well as a discussion of various approaches that have been used to measure liquidity risk. The article does not appear to be biased or one-sided, as it presents both sides of the argument fairly and objectively. Furthermore, it provides evidence for the claims made by citing relevant literature and studies, which adds credibility to the article's arguments.
However, there are some points that could be further explored in order to make the article more comprehensive. For example, while the article discusses various approaches that have been used to measure liquidity risk, it does not provide any insights into how these approaches can be applied in practice or what their limitations are. Additionally, while the article mentions several empirical studies that demonstrate a common feature in liquidity, it does not discuss any potential counterarguments or alternative explanations for this phenomenon.
In conclusion, while this article provides an informative overview of current research into the effects of liquidity risk on derivative pricing, there are some areas where further exploration would be beneficial in order to make it more comprehensive and reliable.