PRICING AMERICAN OPTIONS WITH TRANSACTION COSTS BY COMPLEMENTARITY METHODS

Jong-Shi Pang and Jacqueline Huang
Additional contact information
Jong-Shi Pang: Department of Mathematical Sciences, The Johns Hopkins University, Baltimore, Maryland 21218-2682, USA
Jacqueline Huang: Department of Mathematical Sciences, The Johns Hopkins University, Baltimore, Maryland 21218-2682, USA

Chapter 8 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar(Volume III), 2002, pp 172-198 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe inclusion of nonzero transaction costs in option pricing invalidates the Black–Scholes hedging strategy that relies on continuous rebalancing of the option portfolio. Based on Leland's approach of discrete hedging, this paper presents complementarity based numerical methods for the pricing of American options in the presence of transaction costs. The American option pricing models with transaction costs are formulated as partial differential complementarity problems, which are discretized by finite-difference schemes. The resulting discretized finite-dimensional linear and nonlinear complementarity problems are shown to have solutions, which are computable by iterative complementarity methods. Numerical results are reported.

Keywords: Quantitative Analysis; Financial Markets (search for similar items in EconPapers)
Date: 2002
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789812778451_0008 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789812778451_0008 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789812778451_0008

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().