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Price systems for markets with transaction costs and control problems for some finance problems

Tzuu-Shuh Chiang·Shang-Yuan Shiu·Shuenn-Jyi Sheu
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Abstract

In a market with transaction costs, the price of a derivative can be expressed in terms of (preconsistent) price systems (after Kusuoka (1995)). In this paper, we consider a market with binomial model for stock price and discuss how to generate the price systems. From this, the price formula of a derivative can be reformulated as a stochastic control problem. Then the dynamic programming approach can be used to calculate the price. We also discuss optimization of expected utility using price systems.

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Tzuu-Shuh Chiang, Shang-Yuan Shiu, Shuenn-Jyi Sheu. 2007-02-27. Price systems for markets with transaction costs and control problems for some finance problems. https://doi.org/10.1214/074921706000001094

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