Approximate hedging problem with transaction costs in stochastic volatility markets

DOI10.1111/MAFI.12094MaRDI QIDQ5283405zbMATH OpenOpenAlexFDO

Authors

Publication date 21 July 2017

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1505.02546

zbMATH Keywords

quantile hedgingstochastic volatilitytransaction costsapproximate hedgingLeland strategyhigh-frequency markets

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Central limit and other weak theorems (60F05) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: This paper studies the problem of option replication in general stochastic volatility markets with transaction costs, using a new specification for the volatility adjustment in Leland's algorithm cite{Leland}. We prove several limit theorems for the normalized replication error of Leland's strategy, as well as that of the strategy suggested by L'epinette. The asymptotic results obtained not only generalize the existing results, but also enable us to fix the under-hedging property pointed out by Kabanov and Safarian. We also discuss possible methods to improve the convergence rate and to reduce the option price inclusive of transaction costs.

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Cited in

(13)

• Approximate Hedging in a Local Volatility Model with Proportional Transaction Costs
• A constructive method for convex solutions of a class of nonlinear Black-Scholes equations
• A new computational tool for analysing dynamic hedging under transaction costs
• Asymptotic replication with modified volatility under small transaction costs
• Approximate hedging for nonlinear transaction costs on the volume of traded assets
• CONDITIONAL-MEAN HEDGING UNDER TRANSACTION COSTS IN GAUSSIAN MODELS
• Approximate Hedging with Constant Proportional Transaction Costs in Financial Markets with Jumps
• Hedging options under transaction costs and stochastic volatility
• Dynamic programming principle and computable prices in financial market models with transaction costs
• Hedging Problem for Asian Call Options with Transaction Costs
• Valuation of European options with stochastic interest rates and transaction costs
• Option hedging theory under transaction costs
• European option pricing with transaction costs and stochastic volatility: an asymptotic analysis

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