Limit theorems for partial hedging under transaction costs

DOI10.1111/J.1467-9965.2012.00525.XzbMATH Open1303.91172arXiv1004.1576OpenAlexW2096770317MaRDI QIDQ2875729FDOQ2875729

Yan Dolinsky

Publication date: 11 August 2014

Published in: Mathematical Finance (Search for Journal in Brave)

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.

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

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zbMATH Keywords

transaction costsAmerican optionslimit theoremsshortfall risk

Mathematics Subject Classification ID

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

Cites Work

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Cited In (6)

• Homogenization and Asymptotics for Small Transaction Costs: The Multidimensional Case
• CONDITIONAL-MEAN HEDGING UNDER TRANSACTION COSTS IN GAUSSIAN MODELS
• Partial Hedging under Transaction Costs
• Dynkin's games and Israeli options
• Small transaction cost asymptotics and dynamic hedging
• On the density of properly maximal claims in financial markets with transaction costs

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