Asymptotic replication with modified volatility under small transaction costs
Mathematical Finance
2014-08-26 v1 Optimization and Control
Probability
Abstract
Dynamic hedging of an European option under a general local volatility model with small linear transaction costs is studied. A continuous control version of Leland's strategy that asymptotically replicates the payoff is constructed. An associated central limit theorem of hedging error is proved. The asymptotic error variance is minimized by an explicit trading strategy.
Keywords
Cite
@article{arxiv.1408.5677,
title = {Asymptotic replication with modified volatility under small transaction costs},
author = {Jiatu Cai and Masaaki Fukasawa},
journal= {arXiv preprint arXiv:1408.5677},
year = {2014}
}