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Post by Kallsen on Sept 23, 2012 4:46:21 GMT 4
Option Pricing and Hedging with Small Transaction Costs Jan Kallsen Munich University of Technology Johannes Muhle-Karbe ETH Zürich September 18, 2012 Swiss Finance Institute Research Paper No. 12-30 Abstract: An investor with constant absolute risk aversion trades a risky asset with general Itôdynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated welfare, expressed in terms of the local dynamics of the frictionless optimizer. By applying these results in the presence of a random endowment, we obtain asymptotic formulas for utility indierence prices and hedging strategies in the presence of small transaction costs. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2148502_code623849.pdf?abstractid=2148502&mirid=2
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