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

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

Risultato della ricerca: Article

3 Citazioni (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.
Lingua originaleEnglish
pagine (da-a)981-1008
Numero di pagine28
RivistaIMA Journal of Applied Mathematics
Volume80
Stato di pubblicazionePublished - 2015

Fingerprint

European Options
Stochastic Volatility
Asymptotic analysis
Transaction Costs
Option Pricing
Asymptotic Analysis
Mean Reversion
Hedging
Term
Valuation
Costs
Model
Strategy

All Science Journal Classification (ASJC) codes

  • Applied Mathematics

Cita questo

@article{b786334998f44f8d925a1e85da53662b,
title = "European Option Pricing with Transaction Costs and Stochastic Volatility: an Asymptotic Analysis",
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.",
author = "Sammartino, {Marco Maria Luigi} and Gaetana Gambino and Caflisch, {Russel E.} and Sgarra",
year = "2015",
language = "English",
volume = "80",
pages = "981--1008",
journal = "IMA Journal of Applied Mathematics",
issn = "0272-4960",
publisher = "Oxford University Press",

}

TY - JOUR

T1 - European Option Pricing with Transaction Costs and Stochastic Volatility: an Asymptotic Analysis

AU - Sammartino, Marco Maria Luigi

AU - Gambino, Gaetana

AU - Caflisch, Russel E.

AU - Sgarra, null

PY - 2015

Y1 - 2015

N2 - 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.

AB - 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.

UR - http://hdl.handle.net/10447/96538

M3 - Article

VL - 80

SP - 981

EP - 1008

JO - IMA Journal of Applied Mathematics

JF - IMA Journal of Applied Mathematics

SN - 0272-4960

ER -