Approximate hedging problem with transaction costs in stochastic volatility markets

Huu Thai Nguyen () and Serguei Pergamenchtchikov ()
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Huu Thai Nguyen: LMRS - Laboratoire de Mathématiques Raphaël Salem - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - CNRS - Centre National de la Recherche Scientifique
Serguei Pergamenchtchikov: LMRS - Laboratoire de Mathématiques Raphaël Salem - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - CNRS - Centre National de la Recherche Scientifique
Authors registered in the RePEc Author Service: Sergey Pergamenshchikov ()

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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.

Keywords: Leland strategy; transaction costs; quantile hedging; limit theorem (search for similar items in EconPapers)
Date: 2012-11-01
New Economics Papers: this item is included in nep-fmk and nep-ore
Note: View the original document on HAL open archive server: https://hal.science/hal-00747689v3
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Citations: View citations in EconPapers (3)

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Working Paper: Approximate hedging problem with transaction costs in stochastic volatility markets (2012)
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