HEDGING AND PORTFOLIO OPTIMIZATION UNDER TRANSACTION COSTS: A MARTINGALE APPROACH-super-2
AbstractWe derive a formula for the minimal initial wealth needed to hedge an arbitrary contingent claim in a continuous-time model with proportional transaction costs; the expression obtained can be interpreted as the supremum of expected discounted values of the claim, over all (pairs of) probability measures under which the "wealth process" is a supermartingale. Next, we prove the existence of an optimal solution to the portfolio optimization problem of maximizing utility from terminal wealth in the same model, we also characterize this solution via a transformation to a hedging problem: the optimal portfolio is the one that hedges the inverse of marginal utility evaluated at the shadow state-price density solving the corresponding dual problem, if such exists. We can then use the optimal shadow state-price density for pricing contingent claims in this market. the mathematical tools are those of continuous-time martingales, convex analysis, functional analysis, and duality theory. Copyright 1996 Blackwell Publishers.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Mathematical Finance.
Volume (Year): 6 (1996)
Issue (Month): 2 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627
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