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Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate

Sebastien Darses () and Emmanuel Denis
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Sebastien Darses: LATP - Laboratoire d'Analyse, Topologie, Probabilités - Université Paul Cézanne - Aix-Marseille 3 - Université de Provence - Aix-Marseille 1 - CNRS - Centre National de la Recherche Scientifique
Emmanuel Denis: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

Authors registered in the RePEc Author Service: Emmanuel Lépinette

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Abstract: We study the Leland model for hedging portfolios in the presence of a constant proportional transaction costs coefficient. The modified Leland's strategy recently defined by the second author, contrarily to the classical one, ensures the asymptotic replication of a large class of payoff. In this setting, we prove a limit theorem for the deviation between the real portfolio and the payoff. As Pergamenshchikov did in the framework of the usual Leland's strategy, we identify the rate of convergence and the associated limit distribution. This rate turns out to be improved using the modified strategy and non periodic revision dates.

Keywords: Asymptotic hedging; Leland-Lott strategy; Transaction costs; Martingale limit theorem.; Martingale limit theorem (search for similar items in EconPapers)
Date: 2010-02-22
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