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Conservative delta hedging under transaction costs


  • Masaaki Fukasawa


Explicit robust hedging strategies for convex or concave payoffs under a continuous semimartingale model with uncertainty and small transaction costs are constructed. In an asymptotic sense, the upper and lower bounds of the cumulative volatility enable us to super-hedge convex and concave payoffs respectively. The idea is a combination of Mykland's conservative delta hedging and Leland's enlarging volatility. We use a specific sequence of stopping times as rebalancing dates, which can be superior to equidistant one even when there is no model uncertainty. A central limit theorem for the super-hedging error as the coefficient of linear transaction costs tends to zero is proved. The mean squared error is also studied.

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  • Masaaki Fukasawa, 2011. "Conservative delta hedging under transaction costs," Papers 1103.2013,, revised Jan 2012.
  • Handle: RePEc:arx:papers:1103.2013

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