Robust hedging with proportional transaction costs

Yan Dolinsky () and H. Soner ()

Finance and Stochastics, 2014, vol. 18, issue 2, 327-347

Abstract: A duality for robust hedging with proportional transaction costs of path-dependent European options is obtained in a discrete-time financial market with one risky asset. The investor’s portfolio consists of a dynamically traded stock and a static position in vanilla options, which can be exercised at maturity. Trading of both options and stock is subject to proportional transaction costs. The main theorem is a duality between hedging and a Monge–Kantorovich-type optimization problem. In this dual transport problem, the optimization is over all probability measures that satisfy an approximate martingale condition related to consistent price systems, in addition to an approximate marginal constraint. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: European options; Robust hedging; Transaction costs; Weak convergence; Consistent price systems; Optimal transport; Fundamental theorem of asset pricing; Superreplication; 91G10; 60G42; G11; G13; D52 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (47)

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DOI: 10.1007/s00780-014-0227-x

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