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Scaling and long-range dependence in option pricing V: Multiscaling hedging and implied volatility smiles under the fractional Black–Scholes model with transaction costs

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  • Wang, Xiao-Tian
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    Abstract

    This paper deals with the problem of discrete time option pricing using the fractional Black–Scholes model with transaction costs. Through the ‘anchoring and adjustment’ argument in a discrete time setting, a European call option pricing formula is obtained. The minimal price of an option under transaction costs is obtained. In addition, the relation between scaling and implied volatility smiles is discussed.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437110010538
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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 390 (2011)
    Issue (Month): 9 ()
    Pages: 1623-1634

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    Handle: RePEc:eee:phsmap:v:390:y:2011:i:9:p:1623-1634

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Anchoring adjustment; Delta hedging; Scaling; Implied volatility smiles; Transaction costs;

    References

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    Cited by:
    1. Xiao, Weilin & Zhang, Weiguo & Xu, Weijun & Zhang, Xili, 2012. "The valuation of equity warrants in a fractional Brownian environment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1742-1752.
    2. Jia, Zhanliang & Cui, Meilan & Li, Handong, 2012. "Research on the relationship between the multifractality and long memory of realized volatility in the SSECI," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(3), pages 740-749.

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