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Conditional-Mean Hedging Under Transaction Costs in Gaussian Models

Tommi Sottinen and Lauri Viitasaari

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Abstract: We consider so-called regular invertible Gaussian Volterra processes and derive a formula for their prediction laws. Examples of such processes include the fractional Brownian motions and the mixed fractional Brownian motions. As an application, we consider conditional-mean hedging under transaction costs in Black-Scholes type pricing models where the Brownian motion is replaced with a more general regular invertible Gaussian Volterra process.

Date: 2017-08
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Handle: RePEc:arx:papers:1708.03242