Conservative Delta Hedging under Transaction Costs

Masaaki Fukasawa
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Masaaki Fukasawa: Department of Mathematics, Osaka University, Japan

Chapter 4 in Recent Advances in Financial Engineering 2011, 2012, pp 55-72 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractExplicit robust hedging strategies for convex or concave payoffs under a continuous semimartingale model with uncertainty and small transaction costs are constructed. In an asymptotic sense, the upper and lower bounds of the cumulative volatility enable us to super-hedge convex and concave payoffs respectively. The idea is a combination of Mykland's conservative delta hedging and Leland's enlarging volatility. We use a specific sequence of stopping times as rebalancing dates, which can be superior to equidistant one even when there is no model uncertainty. A central limit theorem for the super-hedging error as the coefficient of linear transaction costs tends to zero is proved. The mean squared error is also studied.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2012
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