Advances in Applied Probability

Risk minimization for game options in markets imposing minimal transaction costs

Yan Dolinsky and Yuri Kifer

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Abstract

We study partial hedging for game options in markets with transaction costs bounded from below. More precisely, we assume that the investor's transaction costs for each trade are the maximum between proportional transaction costs and a fixed transaction cost. We prove that in the continuous-time Black‒Scholes (BS) model, there exists a trading strategy which minimizes the shortfall risk. Furthermore, we use binomial models in order to provide numerical schemes for the calculation of the shortfall risk and the corresponding optimal portfolio in the BS model.

Article information

Source
Adv. in Appl. Probab., Volume 48, Number 3 (2016), 926-946.

Dates
First available in Project Euclid: 19 September 2016

Permanent link to this document
https://projecteuclid.org/euclid.aap/1474296321

Mathematical Reviews number (MathSciNet)
MR3568898

Zentralblatt MATH identifier
1380.91129

Subjects
Primary: 91G10: Portfolio theory 91G20: Derivative securities
Secondary: 60F15: Strong theorems 60G40: Stopping times; optimal stopping problems; gambling theory [See also 62L15, 91A60] 60G44: Martingales with continuous parameter

Keywords
Game option transaction cost hedging with friction risk minimization

Citation

Dolinsky, Yan; Kifer, Yuri. Risk minimization for game options in markets imposing minimal transaction costs. Adv. in Appl. Probab. 48 (2016), no. 3, 926--946. https://projecteuclid.org/euclid.aap/1474296321


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