In this paper, the valuation problem of a European call option in the presence of both stochastic volatility and transaction costs is considered. In the limit of small transaction costs and fast mean reversion, an asymptotic expression for the option price is obtained. While the dominant term in the expansion is shown to be the classical Black and Scholes solution, the correction terms appear at O(ε1/2) and O(ε). The optimal hedging strategy is then explicitly obtained for Scott's model.
|Number of pages||28|
|Journal||IMA Journal of Applied Mathematics|
|Publication status||Published - 2015|
All Science Journal Classification (ASJC) codes
- Applied Mathematics
Gambino, G., Sammartino, M. M. L., Sgarra, & Caflisch, R. E. (2015). European Option Pricing with Transaction Costs and Stochastic Volatility: an Asymptotic Analysis. IMA Journal of Applied Mathematics, 80, 981-1008.