Hedging under an expected loss constraint with small transaction costs

Bruno Bouchard, Ludovic Moreau and Mete H. Soner
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Bruno Bouchard: CEREMADE, CREST

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Abstract: We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small transactions is used to obtain a tractable model. A general expansion theory is developed using the dynamic programming approach. Explicit formulae are also obtained in the special cases of an exponential or power loss function. As a corollary, we retrieve the asymptotics for the exponential utility indifference price.

Date: 2013-09, Revised 2014-09
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (2)

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