Convex duality with transaction costs

Yan Dolinsky and H. Mete Soner

Papers from arXiv.org

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 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.

Date: 2015-02, Revised 2015-10
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Citations: View citations in EconPapers (2)

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