There is No Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs
Title | There is No Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs PDF eBook |
Author | University of Minnesota. Institute for Mathematics and Its Applications |
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Release | 1994 |
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Option Pricing with Transaction Costs and a Nonlinear Black Scholes Equation
Title | Option Pricing with Transaction Costs and a Nonlinear Black Scholes Equation PDF eBook |
Author | Guy Barles |
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Release | 1998 |
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In a market with transaction costs, generally, there is no nontrivial portfolio that dominates a contingent claim. Therefore, in such a market, preferences have to be introduced in order to evaluate the prices of options. The main goal of this article is to quantify this dependence on preferences in the specific example of a European call option. This is achieved by using the utility function approach of Hodges and Neuberger together with an asymptotic analysis of partial differential equations. We are led to a nonlinear Black-Scholes equation with an adjusted volatility which is a function of the second derivative of the price itself. In this model, our attitude towards risk is summarized in one free parameter a which appears in the nonlinear Black-Scholes equation : we provide an upper bound for the probability of missing the hedge in terms of a and the magnitude of the proportional transaction cost which shows the connections between this parameter a and the risk.
Markets with Transaction Costs
Title | Markets with Transaction Costs PDF eBook |
Author | Yuri Kabanov |
Publisher | Springer Science & Business Media |
Pages | 306 |
Release | 2009-12-04 |
Genre | Business & Economics |
ISBN | 3540681213 |
The book is the first monograph on this highly important subject.
Lectures on the Mathematics of Finance
Title | Lectures on the Mathematics of Finance PDF eBook |
Author | Ioannis Karatzas |
Publisher | American Mathematical Soc. |
Pages | 163 |
Release | 1997 |
Genre | Business & Economics |
ISBN | 0821809091 |
In this text, the author discusses the main aspects of mathematical finance. These include, arbitrage, hedging and pricing of contingent claims, portfolio optimization, incomplete and/or constrained markets, equilibrium, and transaction costs. The book outlines advances made possible during the last fifteen years due to the methodologies of stochastic analysis and control. Readers are presented with current research, and open problems are suggested. This tutorial survey of the rapidly expanding field of mathematical finance is addressed primarily to graduate students in mathematics. Familiarity is assumed with stochastic analysis and parabolic partial differential equations. The text makes significant use of students' mathematical skills, but always in connection with interesting applied problems.
Option Pricing and Hedging with Transaction Costs
Title | Option Pricing and Hedging with Transaction Costs PDF eBook |
Author | Ling Chen |
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Release | 2010 |
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The traditional Black-Scholes theory on pricing and hedging of European call options has long been criticized for its oversimplified and unrealistic model assumptions. This dissertation investigates several existing modifications and extensions of the Black-Scholes model and proposes new data-driven approaches to both option pricing and hedging for real data. The semiparametric pricing approach initially proposed by Lai and Wong (2004) provides a first attempt to bridge the gap between model and market option prices. However, its application to the S & P 500 futures options is not a success, when the original additive regression splines are used for the nonparametric part of the pricing formula. Having found a strong autocorrelation in the time-series of the Black-Scholes pricing residuals, we propose a lag-1 correction for the Black-Scholes price, which essentially is a time-series modeling of the nonparametric part in the semiparametric approach. This simple but efficient time-series approach gives an outstanding pricing performance for S & P 500 futures options, even compared with the commonly practiced and favored implied volatility approaches. A major type of approaches to option hedging with proportional transaction costs is based on singular stochastic control problems that seek an optimal balance between the cost and the risk of hedging an option. We propose a data-driven rule-based strategy to connect the theoretical approaches with real-world applications. Similar to the optimal strategies in theory, the rule-based strategy can be characterized by a pair of buy/sell boundaries and a no-transaction region in between. A two-stage iterative procedure is provided for tuning the boundaries to a long period of option data. Comparing the rule-based strategy with several other existing hedging strategies, we obtain favorable results in both the simulation studies and the empirical study using the S & P 500 futures and futures options. Making use of a reverting pattern of the S & P 500 futures price, we refine the rule-based strategy by allowing hedging suspension at large jumps in futures price.
Stochastic Dominance Option Pricing
Title | Stochastic Dominance Option Pricing PDF eBook |
Author | Stylianos Perrakis |
Publisher | Springer |
Pages | 277 |
Release | 2019-05-03 |
Genre | Business & Economics |
ISBN | 3030115909 |
This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.
A Disturbance Attenuatin Approach to Option Pricing with Transaction Costs
Title | A Disturbance Attenuatin Approach to Option Pricing with Transaction Costs PDF eBook |
Author | Lihui Zheng |
Publisher | |
Pages | 52 |
Release | 2000 |
Genre | Investment analysis |
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