Approximate hedging problem with transaction costs in stochastic volatility markets

Abstract : This paper investigates the problem of hedging European call options using Leland's strategy in stochastic volatility markets with transaction costs. Introducing a new form for the enlarged volatility in Leland's algorithm, we establish a limit theorem and determine a convergence rate for the hedging error. This provides a suggestion to release the underhedging property pointed out by Kabanov and Safarian (1997). Possibilities to improve the convergence rate and lower the option price inclusive transaction costs are also discussed.
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Preprints, Working Papers, ...
47. 2012


https://hal.archives-ouvertes.fr/hal-00747689
Contributor : Huu Thai Nguyen <>
Submitted on : Friday, April 11, 2014 - 6:03:50 PM
Last modification on : Monday, April 14, 2014 - 9:25:28 AM

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Huu Thai Nguyen, Serguei Pergamenchtchikov. Approximate hedging problem with transaction costs in stochastic volatility markets. 47. 2012. <hal-00747689v3>

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