Limit theorems for partial hedging under transaction costs

DOI10.1111/J.1467-9965.2012.00525.XMaRDI QIDQ2875729zbMATH OpenOpenAlexFDO

Authors Yan Dolinsky

Publication date 11 August 2014

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1004.1576

zbMATH Keywords

American optionslimit theoremsshortfall risktransaction costs

Mathematics Subject Classification ID

Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We study shortfall risk minimization for American options with path dependent payoffs under proportional transaction costs in the Black--Scholes (BS) model. We show that for this case the shortfall risk is a limit of similar terms in an appropriate sequence of binomial models. We also prove that in the continuous time BS model for a given initial capital there exists a portfolio strategy which minimizes the shortfall risk. In the absence of transactions costs (complete markets) similar limit theorems were obtained in Dolinsky and Kifer (2008, 2010) for game options. In the presence of transaction costs the markets are no longer complete and additional machinery required. Shortfall risk minimization for American options under transaction costs was not studied before.

Review text

The author considers a Black and Scholes like model and studies the problem of minimizing the shortfall risk of a path dependent claim in the presence of proportional transaction costs. The shortfall is defined as the maximal (with respect to stopping times) expected excess of the given contingent claim relatively to the value at liquidation of a given portfolio. The author shows that the minimal expected shortfall can be attained (Theorem 2.1) and that such minimum value can be approximated arbitrarily well by taking a sequence of binomial models (Theorem 2.2).

Recommendations

• Risk minimization for game options in markets imposing minimal transaction costs
• Partial hedging of American contingent claims in a finite discrete time model
• Partial Hedging under Transaction Costs
• Shortfall risk minimization under fixed transaction costs
• Hedging of American options under transaction costs

Cites work

• A closed-form solution to the problem of super-replication under transaction costs
• Binomial Approximations for Barrier Options of Israeli Style
• Binomial approximations of shortfall risk for game options
• Error estimates for binomial approximations of game options
• Game options
• HEDGING AND PORTFOLIO OPTIMIZATION UNDER TRANSACTION COSTS: A MARTINGALE APPROACH¹²
• Hedging of game options with the presence of transaction costs
• scientific article; zbMATH DE number 5016447 (Why is no real title available?)
• On the possibility of hedging options in the presence of transaction costs
• Optimal investment with transaction costs and without semimartingales
• Partial Hedging under Transaction Costs
• Replication and shortfall risk in a binomial model with transaction costs
• Risk minimization under transaction costs
• The efficient hedging problem for American options
• The super-replication problem via probabilistic methods
• There is no nontrivial hedging portfolio for option pricing with transaction costs

Cited in

(11)

• Replication and shortfall risk in a binomial model with transaction costs
• Dynkin's games and Israeli options
• On the density of properly maximal claims in financial markets with transaction costs
• Small transaction cost asymptotics and dynamic hedging
• Risk minimization for game options in markets imposing minimal transaction costs
• Shortfall risk approximations for American options in the multidimensional Black-Scholes model
• Homogenization and Asymptotics for Small Transaction Costs: The Multidimensional Case
• Partial Hedging under Transaction Costs
• Shortfall risk minimization under fixed transaction costs
• Partial hedging of American contingent claims in a finite discrete time model
• CONDITIONAL-MEAN HEDGING UNDER TRANSACTION COSTS IN GAUSSIAN MODELS

This page was built for publication: Limit theorems for partial hedging under transaction costs

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2875729)