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Proportional Transaction Costs (proportional + transaction_cost)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

The Fundamental Theorem of Asset Pricing under Proportional Transaction Costs in Finite Discrete Time

MATHEMATICAL FINANCE, Issue 1 2004
Walter SchachermayerArticle first published online: 24 DEC 200
We prove a version of the Fundamental Theorem of Asset Pricing, which applies to Kabanov's modeling of foreign exchange markets under transaction costs. The financial market is described by a d×d matrix-valued stochastic process (,t)Tt=0 specifying the mutual bid and ask prices between d assets. We introduce the notion of "robust no arbitrage," which is a version of the no-arbitrage concept, robust with respect to small changes of the bid-ask spreads of (,t)Tt=0. The main theorem states that the bid-ask process (,t)Tt=0 satisfies the robust no-arbitrage condition iff it admits a strictly consistent pricing system. This result extends the theorems of Harrison-Pliska and Kabanov-Stricker pertaining to the case of finite ,, as well as the theorem of Dalang, Morton, and Willinger and Kabanov, Rásonyi, and Stricker, pertaining to the case of general ,. An example of a 5 × 5 -dimensional process (,t)2t=0 shows that, in this theorem, the robust no-arbitrage condition cannot be replaced by the so-called strict no-arbitrage condition, thus answering negatively a question raised by Kabanov, Rásonyi, and Stricker. [source]

Bounds on Derivative Prices in an Intertemporal Setting with Proportional Transaction Costs and Multiple Securities

MATHEMATICAL FINANCE, Issue 3 2001
George M. Constantinides
The observed discrepancies of derivative prices from their theoretical, arbitrage-free values are examined in the presence of transaction costs. Analytic upper and lower bounds on the reservation write and purchase prices, respectively, are obtained when an investor's preferences exhibit constant relative risk aversion between zero and one. The economy consists of multiple primary securities with stationary returns, a constant rate of interest, and any number of American or European derivatives with, possibly, path-dependent arbitrary payoffs. [source]

Randomized Stopping Times and American Option Pricing with Transaction Costs

MATHEMATICAL FINANCE, Issue 1 2001
Prasad Chalasani
In a general discrete-time market model with proportional transaction costs, we derive new expectation representations of the range of arbitrage-free prices of an arbitrary American option. The upper bound of this range is called the upper hedging price, and is the smallest initial wealth needed to construct a self-financing portfolio whose value dominates the option payoff at all times. A surprising feature of our upper hedging price representation is that it requires the use of randomized stopping times (Baxter and Chacon 1977), just as ordinary stopping times are needed in the absence of transaction costs. We also represent the upper hedging price as the optimum value of a variety of optimization problems. Additionally, we show a two-player game where at Nash equilibrium the value to both players is the upper hedging price, and one of the players must in general choose a mixture of stopping times. We derive similar representations for the lower hedging price as well. Our results make use of strong duality in linear programming. [source]

Optimum futures hedge in the presence of clustered supply and demand shocks, stochastic basis, and firm's costs of hedging

THE JOURNAL OF FUTURES MARKETS, Issue 12 2003
Carolyn W. Chang
In a doubly stochastic jump-diffusion economy with stochastic jump arrival intensity and proportional transaction costs, we develop a five-factor risk-return asset pricing inequality to model optimum futures hedge in the presence of clustered supply and demand shocks, stochastic basis, and firm's costs of hedging. Concave risk-return tradeoff dictates a hedge ratio to be substantially less than the traditional risk-minimization one. The ratio now comprises a positive diffusion, a positive jump, and a negative hedging cost component. The faster jumps arrive, and the more hedging costs, the more pronounced are the respective jump and hedging cost effects. Empirical validation confirms that actual industry hedge ratios vary significantly across firm's costs of and efficiency in hedging and are significantly lower than what risk-minimization dictates. The model also can be used to compute a threshold production level for determining if a firm should hedge. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1209,1237, 2003 [source]