Asymptotic replication with modified volatility under small transaction costs

作者：Cai Jiatu; Fukasawa Masaaki^*

来源：Finance and Stochastics, 2016, 20(2): 381-431.

DOI：10.1007/s00780-016-0294-2

• Leland's strategy
• Proportional transaction costs
• Singular control
• Homogenization
• Central limit theorem

We consider the dynamic hedging of a European option under a general local volatility model with small proportional transaction costs. Extending the approach of Leland, we introduce a class of continuous strategies of finite cost that asymptotically (super-)replicate the payoff. An associated central limit theorem for the hedging error is proved. We also obtain an explicit trading strategy minimizing the asymptotic error variance.

• 出版日期2016-4