Convex Duality with Transaction Costs

Yan Dolinsky and Halil Mete Soner
Additional contact information
Yan Dolinsky: ETH Zurich
Halil Mete Soner: ETH Zurich and Swiss Finance Institute

No 16-71, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Convex duality for two two different super-replication problems in a continuous time financial market with proportional transaction cost is proved. In this market, static hedging in a finite number of options, in addition to usual dynamic hedging with the underlying stock, are allowed. The first one of the problems considered is the model-independent hedging that requires the super-replication to hold for every continuous path. In the second one the market model is given through a probability measure P and the inequalities are understood P almost surely. The main result, using the convex duality, proves that the two super-replication problems have the same value provided that P satisfies the conditional full support property. Hence, the transaction costs prevents one from using the structure of a specific model to reduce the super-replication cost.

Keywords: European Options; Model-free Hedging; Semi Static Hedging; Trans- action Costs; Conditional Full Support (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016-04
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881309 (application/pdf)

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:chf:rpseri:rp1671

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().