Approximate hedging in a local volatility model with proportional transaction costs

Quoc, Tuan Tran; Lépinette, Emmanuel

Quoc, Tuan Tran; Lépinette, Emmanuel (2014), Approximate hedging in a local volatility model with proportional transaction costs, Applied Mathematical Finance, 21, 4, p. 313-341. http://dx.doi.org/10.1080/1350486X.2013.871802

Type

Article accepté pour publication ou publié

External document link

http://hal.archives-ouvertes.fr/hal-00687389

Date

2014

Journal name

Applied Mathematical Finance

Volume

Number

Publisher

Chapman & Hall

Pages

313-341

Abstract (EN)

Local volatility models are popular because they can be simply calibrated to the market of European options. We extend the results of [4], [3] for such models, i.e. we propose a modi ed Leland method which allows us to approximately replicate a European contingent claim when the market is under proportional transaction costs.

Subjects / Keywords

transaction costs; Leland strategy; approximate hedging; Black-Scholes formula

JEL

D23 - Organizational Behavior; Transaction Costs; Property Rights