Approximate Hedging in a Local Volatility Model with Proportional Transaction Costs

Emmanuel Lépinette and Tuan Tran

Applied Mathematical Finance, 2014, vol. 21, issue 4, 313-341

Abstract: Local volatility models are popular as they can be calibrated to the market of European options by the simple Dupire formula. For such a model, we propose a modified Leland method which allows to approximately replicate a European contingent claim when the market is under proportional transaction costs. The convergence of the scheme is shown by means of a new strategy of proof based on partial differential equations (PDEs) techniques allowing us to obtain appropriate Greek estimations.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1080/1350486X.2013.871802 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:21:y:2014:i:4:p:313-341

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486X.2013.871802

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().