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Super-Replication with Fixed Transaction Costs

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  • Peter Bank
  • Yan Dolinsky

Abstract

We study super--replication of contingent claims in markets with fixed transaction costs. This can be viewed as a stochastic impulse control problem with a terminal state constraint. The first result in this paper reveals that in reasonable continuous time financial market models the super--replication price is prohibitively costly and leads to trivial buy--and--hold strategies. Our second result derives nontrivial scaling limits of super--replication prices for binomial models with small fixed costs.

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  • Peter Bank & Yan Dolinsky, 2016. "Super-Replication with Fixed Transaction Costs," Papers 1610.09234, arXiv.org, revised Oct 2018.
    • Handle: RePEc:arx:papers:1610.09234
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    References listed on IDEAS

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    1. Ralf Korn, 1998. "Portfolio optimisation with strictly positive transaction costs and impulse control," Finance and Stochastics, Springer, vol. 2(2), pages 85-114.
    2. Yan Dolinsky & Halil Soner, 2013. "Duality and convergence for binomial markets with friction," Finance and Stochastics, Springer, vol. 17(3), pages 447-475, July.
    3. Peng, Shige, 2008. "Multi-dimensional G-Brownian motion and related stochastic calculus under G-expectation," Stochastic Processes and their Applications, Elsevier, vol. 118(12), pages 2223-2253, December.
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    Cited by:

    1. Romain Blanchard & Laurence Carassus, 2017. "Convergence of utility indifference prices to the superreplication price in a multiple-priors framework," Papers 1709.09465, arXiv.org, revised Oct 2020.

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