Hedging under an expected loss constraint with small transaction costs
Bouchard, Bruno; Moreau, Ludovic; Soner, Halil Mete (2016), Hedging under an expected loss constraint with small transaction costs, SIAM Journal on Financial Mathematics, 7, 1, p. 508-551. 10.1137/15M1006787
TypeArticle accepté pour publication ou publié
External document linkhttps://arxiv.org/abs/1309.4916v2
Journal nameSIAM Journal on Financial Mathematics
Society for Industrial and Applied Mathematics
MetadataShow full item record
CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Soner, Halil Mete
Abstract (EN)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.
Subjects / KeywordsExpected loss constraint; transaction cost; asymptotic expansion; hedging
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