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Option Pricing via Utility Maximization in the presence of Transaction Costs: an Asymptotic Analysis

Bouchard, Bruno (2000), Option Pricing via Utility Maximization in the presence of Transaction Costs: an Asymptotic Analysis. https://basepub.dauphine.fr/handle/123456789/6707

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Type
Document de travail / Working paper
Date
2000
Publisher
Cahiers du CEREMADE
Series title
Cahiers du CEREMADE
Published in
Paris
Metadata
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Author(s)
Bouchard, Bruno
CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Abstract (EN)
We consider a multivariate financial market with proportional transaction costs as in Kabanov (1999). We study the problem of contingent claim pricing via utility maximization as in Hodges and Neuberger (1989). Using an exponential utility function, we derive a closed form characterization for the asymptotic price as the risk aversion tends to infinity. We prove that it is reduced to the super-replication cost if the initial endowment is only invested in the non-risky asset, as it was conjectured in Barles and Soner (1996). We do not make use of the dual formulation for the super-replication price obtained in Kabanov (1999).
Subjects / Keywords
viscosity solutions; Transaction costs; Stochastic games; dynamic programming; option pricing
JEL
C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
G11 - Portfolio Choice; Investment Decisions
G13 - Contingent Pricing; Futures Pricing