Price systems for markets with transaction costs and control problems for some finance problems
Tzuu-Shuh Chiang, Shang-Yuan Shiu, Shuenn-Jyi Sheu
Abstract
In a market with transaction costs, the price of a derivative can be expressed in terms of (preconsistent) price systems (after Kusuoka (1995)). In this paper, we consider a market with binomial model for stock price and discuss how to generate the price systems. From this, the price formula of a derivative can be reformulated as a stochastic control problem. Then the dynamic programming approach can be used to calculate the price. We also discuss optimization of expected utility using price systems.
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Primary Subjects: 60K35
Keywords: dynamic programming; duality method; price system; pricing derivatives; portfolio optimization; stochastic control; transaction cost
Full-text: Open access
Links and Identifiers
Permanent link to this document: http://projecteuclid.org/euclid.lnms/1196285980
Digital Object Identifier: doi:10.1214/074921706000001094
Institute of Mathematical Statistics Lecture Notes - Monograph Series
