European Option Pricing with Transaction Costs and Stochastic Volatility: an Asymptotic Analysis

Gaetana Gambino, Marco Maria Luigi Sammartino, Sgarra, Russel E. Caflisch

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)981-1008
Number of pages28
JournalIMA Journal of Applied Mathematics
Volume80
Publication statusPublished - 2015

All Science Journal Classification (ASJC) codes

  • Applied Mathematics

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