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Conservative delta hedging under transaction costs.

Fri, 01/13/2012 - 15:01 — SomNambul
Authors: Masaaki Fukasawa
Subjects: Pricing of Securities
link: http://arxiv.org/abs/1103.2013
Abstract

Explicit robust hedging strategies for convex or concave payoffs under a
continuous semimartingale model with uncertainty and small transaction costs
are constructed. In an asymptotic sense, the upper and lower bounds of the
cumulative volatility enable us to super-hedge convex and concave payoffs
respectively. The idea is a combination of Mykland's conservative delta hedging
and Leland's enlarging volatility. We use a specific sequence of stopping times
as rebalancing dates, which can be superior to equidistant one even when there
is no model uncertainty. A central limit theorem for the super-hedging error as
the coefficient of linear transaction costs tends to zero is proved. The mean
squared error is also studied.

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