Replication and shortfall risk in a binomial model with transaction costs

Barbara Trivellato ()

Mathematical Methods of Operations Research, 2009, vol. 69, issue 1, 26 pages

Abstract: The shortfall risk is defined as the optimal mean value of the terminal deficit produced by a self-financing portfolio whose initial value is smaller than what is required to replicate a contingent claim. In this paper we look for an explicit expression for it, as well as for the optimal strategy, when the market model is a binomial model with proportional transaction costs. We first study replication of European claims which satisfy suitable assumptions. We then investigate the shortfall minimization problem in a framework very similar to that without transaction costs. Copyright Springer-Verlag 2009

Keywords: Replication; Shortfall risk; Binomial model; Transaction costs (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1007/s00186-007-0208-3

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