Approximate hedging problem with transaction costs in stochastic volatility markets

DOI10.1111/MAFI.12094zbMATH Open1391.91159arXiv1505.02546OpenAlexW2100680578MaRDI QIDQ5283405FDOQ5283405

Authors:

Publication date: 21 July 2017

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

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.

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

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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)

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Cited In (13)

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

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