Non Quadratic Local Risk-Minimization for Hedging Contingent Claims in the Presence of Transaction Costs
This paper is devoted to the study of derivative hedging in incomplete markets when frictions are considered. We extend the general local risk minimisation approach introduced in  to account for liquidity costs, and derive the corresponding optimal strategies in both the discrete- and continuous-time settings. We examplify our method in the case of stochastic volatility and/or jump-diffusion models.
|Date of creation:||09 Sep 2011|
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- Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
- David Heath & Eckhard Platen & Martin Schweizer, 2001. "A Comparison of Two Quadratic Approaches to Hedging in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 11(4), pages 385-413.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
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