Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate
AbstractWe study the Leland model for hedging portfolios in the presence of a constant proportional transaction costs coefficient. The modified Leland's strategy recently defined by the second author, contrarily to the classical one, ensures the asymptotic replication of a large class of payoff. In this setting, we prove a limit theorem for the deviation between the real portfolio and the payoff. As Pergamenshchikov did in the framework of the usual Leland's strategy, we identify the rate of convergence and the associated limit distribution. This rate turns out to be improved using the modified strategy and non periodic revision dates.
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Date of creation: 22 Feb 2010
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Asymptotic hedging ; Leland-Lott strategy ; Transaction costs ; Martingale limit theorem.;
Other versions of this item:
- Lépinette-Denis, Emmanuel & Darses, Sébastien, 2011. "Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate," Economics Papers from University Paris Dauphine 123456789/4055, Paris Dauphine University.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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- Y. M. Kabanov & M. Safarian, 1995.
"On Leland's Strategy of Option Pricing with Transaction Costs,"
SFB 373 Discussion Papers
1995,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Yuri M. Kabanov & (*), Mher M. Safarian, 1997. "On Leland's strategy of option pricing with transactions costs," Finance and Stochastics, Springer, vol. 1(3), pages 239-250.
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