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.
Information
Published: 1 January 2006
First available in Project Euclid: 28 November 2007
zbMATH: 1268.91161
MathSciNet: MR2427853
Digital Object Identifier: 10.1214/074921706000001094
Subjects:
Primary:
60K35
Keywords:
duality method
,
dynamic programming
,
Portfolio optimization
,
price system
,
pricing derivatives
,
Stochastic control
,
transaction cost
Rights: Copyright © 2006, Institute of Mathematical Statistics
