Journal Article10.1111/J.1540-6261.1985.TB02383.X
Option Pricing and Replication with Transactions Costs
TL;DR: In this paper, a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision was developed, which permits calculation of the transactions costs of option replication and provides bounds on option prices.
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Abstract: Transactions costs invalidate the Black-Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black-Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision. Hedging errors are uncorrelated with the market and approach zero with more frequent revision. The technique permits calculation of the transactions costs of option replication and provides bounds on option prices.
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Citations
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Approximate Hedging of Contingent Claims Under Transaction Costs
TL;DR: In this article, it was shown that for a large class of the pay-off functions Leland's method can be successfully applied for more general options and other types of price processes.
11
Calibration of stochastic volatility models: A Tikhonov regularization approach
Min Dai,Ling Tang,Xingye Yue +2 more
TL;DR: In this article, a Tikhonov regularization approach with an efficient numerical algorithm is proposed to recover the risk neutral drift term of the volatility process from option prices, which is used for calibration of general stochastic volatility models.
11
Robust hedging performance and volatility risk in option markets: Application to Standard and Poor's 500 and Taiwan index options
TL;DR: In this article, the authors investigated daily robust hedging performance with trading costs for markets of Standard and Poor's (S&P) 500 Index options (SPX) and Taiwan index options (TXO).
10
Research Program in Finance Working Paper RPF-290 Optimal Portfolio Management with Transactions Costs and Capital Gains Taxes
Hayne E. Leland
- 01 Jan 1999
TL;DR: In this article, the optimal trading strategy for an investment fund which in the absence of transactions costs would like to maintain assets in exogenously fixed proportions, e.g. 60/30/10 in stocks, bonds and cash, was examined.
10
A fractional version of the Cox–Ingersoll–Ross interest rate model and pricing double barrier option with Hurst index H∈(23,1)
TL;DR: In this article, the existence and uniqueness of the solution to a fractional version of the Cox-Ingersoll-Ross (fCIR) stochastic differential equation was studied.
10
References
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Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
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The Valuation of Uncertain Income Streams and the Pricing of Options
TL;DR: In this paper, a simple formula for the valuation of uncertain income streams consistent with rational risk averse investor behavior and equilibrium in financial markets is developed for the pricing of an option as a function of its associated stock.
1.6K