A closed-form solution to the problem of super-replication under transaction costs
We study the problem of finding the minimal price needed to dominate European-type contingent claims under proportional transaction costs in a continuous-time diffusion model. The result we prove has already been known in special cases - the minimal super-replicating strategy is the least expensive buy-and-hold strategy. Our contribution consists in showing that this result remains valid for general path-independent claims, and in providing a shorter and more intuitive, financial mathematics-type proof. It is based on a previously known representation of the minimal price as a supremum of the prices in corresponding shadow markets, and on a PDE (viscosity) characterization of that representation.
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Volume (Year): 3 (1999)
Issue (Month): 1 ()
|Note:||received: May 1997; final version received: October 1997|
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