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Thai Huu Nguyen

Publications and source records attributed to Thai Huu Nguyen.

2 recordsLinked to original sources

Approximate hedging with proportional transaction costs in stochastic volatility models with jumps

We study the problem of option replication under constant proportional transaction costs in models where stochastic volatility and jumps are combined to capture the market's important features. Assuming some mild condition on the jump size distribution we show that transaction costs can be approximately compensated by applying the Leland adjusting volatility principle and the asymptotic property of the hedging error due to discrete readjustments is characterized. In particular, the jump risk can be approximately eliminated and the results established in continuous diffusion models are recovered. The study also confirms that for the case of constant trading cost rate, the approximate results established by Kabanov and Safarian (1997)and by Pergamenschikov (2003) are still valid in jump-diffusion models with deterministic volatility using the classical Leland parameter in Leland (1986).

q-fin.MF↗

Approximate hedging problem with transaction costs in stochastic volatility markets

This paper studies the problem of option replication in general stochastic volatility markets with transaction costs, using a new specification for the volatility adjustment in Leland's algorithm \cite{Leland}. We prove several limit theorems for the normalized replication error of Leland's strategy, as well as that of the strategy suggested by Lépinette. The asymptotic results obtained not only generalize the existing results, but also enable us to fix the under-hedging property pointed out by Kabanov and Safarian. We also discuss possible methods to improve the convergence rate and to reduce the option price inclusive of transaction costs.

q-fin.MF↗