Hedging errors with Leland's option model in the presence of transaction costs

详细信息    查看全文

• 作者：Yonggan Zhao ; William T. Ziemba
• 关键词：Option pricing and hedging ; Transaction costs ; Expected percentage of hedging losses
• 刊名：Finance Research Letters
• 出版年：2007
• 出版时间：March 2007
• 年：2007
• 卷：4
• 期：1
• 页码：49-58
• 全文大小：299 K

文摘

Nonzero transaction costs invalidate the Black–Scholes [1973. Journal of Political Economy 81, 637–654] arbitrage argument based on continuous trading. Leland [1985. Journal of Finance 40, 1283–1301] developed a hedging strategy which modifies the Black–Scholes hedging strategy with a volatility adjusted by the length of the rebalance interval and the rate of the proportional transaction cost. Kabanov and Safarian [1997. Finance and Stochastics 1, 239–250] calculated the limiting hedging error of the Leland strategy and pointed out that it is nonzero for the approximate pricing of an European call option, in contradiction to Leland's claim. As a further contribution, we first identify the mathematical flaw in the argument of Leland's claim and then quantify the expected percentage of hedging losses in terms of the hedging frequency and the level of the option strike price.