Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-23T05:59:11.705Z Has data issue: false hasContentIssue false
  • English
  • Français

Hedging in discrete time under transaction costs and continuous-time limit

Part of: Stochastic analysis

Published online by Cambridge University Press:  14 July 2016

Pierre-F. Koehl ,
Huyên Pham  and
Nizar Touzi
Pierre-F. Koehl*
Affiliation:
CREST and ENSAE
Huyên Pham*
Affiliation:
Université de Marne-la-Vallée and CREST
Nizar Touzi*
Affiliation:
CEREMADE and CREST
*
∗Postal address: CREST-ENSAE, Laboratoire de Finance, 3 av. Pierre Larousse, 92245 Malakoff Cedex, France.
∗∗Postal address: Université Marne-la-Vallée, Equipe d'analyse et de mathématiques appliquées, 2 rue de la butte verte, 93166 Noisy-le-grand Cedex, France.
∗∗∗Postal address: Université Paris Dauphine, Centre de recherche en mathématiques de la décision, Place du Maréchal de Lattre-de-Tassigny, 75016 Paris Cedex, France. Email address: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We consider a discrete-time financial market model with L1 risky asset price process subject to proportional transaction costs. In this general setting, using a dual martingale representation we provide sufficient conditions for the super-replication cost to coincide with the replication cost. Next, we study the convergence problem in a stationary binomial model as the time step tends to zero, keeping the proportional transaction costs fixed. We derive lower and upper bounds for the limit of the super-replication cost. In the case of European call options and for a unit initial holding in the risky asset, the upper and lower bounds are equal. This result also holds for the replication cost of European call options. This is evidence (but not a proof) against the common opinion that the replication cost is infinite in a continuous-time model.

Keywords

Transaction costsreplicationsuper-replicationmartingalescontinuous-time limit

MSC classification

Primary: 60H30: Applications of stochastic analysis (to PDE, etc.)
Type
Research Papers
Information
Journal of Applied Probability , Volume 36 , Issue 1 , March 1999 , pp. 163 - 178
Copyright
Copyright © Applied Probability Trust 1999 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bensaid, B, Lesne, J. P., Pagès, H., and Scheinkman, J. (1992). Derivative asset pricing with transaction costs. Math. Finance 2, 63–86.Google Scholar
Boyle, P., and Vorst, T. (1992). Option replication in discrete time with transaction costs. J. Finance 47, 272–293.Google Scholar
Cvitanić, J., and Karatzas, I. (1996). Hedging and portfolio optimization under transaction costs: a martingale approach. Math. Finance 6, 133–166.Google Scholar
Cvitanić, J., Pham, H., and Touzi, N. (1997). A closed-form solution to the problem of super-replication under transaction costs. Finance and Stochastics 3, 35–54.Google Scholar
Jouini, E., and Kallal, H. (1995). Martingales and arbitrage in securities markets with transaction costs. J. Econom. Theory 66, 178–197.Google Scholar
Karatzas, I., and Shreve, S. (1991). Brownian Motion and Stochastic Calculus. Springer, Berlin.Google Scholar
Kusuoka, S. (1995). Limit theorem on option replication with transaction costs. Ann. Appl. Prob. 5, 198–221.Google Scholar
Leland, H. (1985). Option pricing and replication with transaction costs. J. Finance 40, 1283–1301.Google Scholar
Levental, S., and Skorohod, A. V. (1997). On the possibility of hedging options in the presence of transaction costs. Ann. Appl. Prob. 7, 410–443.Google Scholar
Oksendal, B. (1995). Stochastic Differential Equations. Springer, Berlin.Google Scholar
Shirakawa, H., and Konno, H. (1995). Pricing of options under the proportional transaction costs. Preprint, Tokyo Institute of Technology.Google Scholar
Soner, H, Shreve, S. and Cvitanić, J. (1995). There is no nontrivial hedging portfolio for option pricing with transaction costs. Ann. Appl. Prob. 5, 327–355.Google Scholar