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DC Field | Value | Language |
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dc.contributor.author | Monoyios, M | - |
dc.coverage.spatial | 28 | en |
dc.date.accessioned | 2007-06-26T20:38:57Z | - |
dc.date.available | 2007-06-26T20:38:57Z | - |
dc.date.issued | 2001 | - |
dc.identifier.citation | Economics and Finance Working papers, Brunel University, 01-03 | en |
dc.identifier.uri | http://bura.brunel.ac.uk/handle/2438/891 | - |
dc.description.abstract | An e cient algorithm is developed to price European options in the pres- ence of proportional transaction costs, using the optimal portfolio frame- work of Davis (1997). A fair option price is determined by requiring that an in nitesimal diversion of funds into the purchase or sale of options has a neutral e ect on achievable utility. This results in a general option pricing formula, in which option prices are computed from the solution of the investor's basic portfolio selection problem, without the need to solve a more complex optimisation problem involving the insertion of the op- tion payo into the terminal value function. Option prices are computed numerically using a Markov chain approximation to the continuous time singular stochastic optimal control problem, for the case of exponential utility. Comparisons with approximately replicating strategies are made. The method results in a uniquely speci ed option price for every initial holding of stock, and the price lies within bounds which are tight even as transaction costs become large. A general de nition of an option hedg- ing strategy for a utility maximising investor is developed. This involves calculating the perturbation to the optimal portfolio strategy when an option trade is executed. | en |
dc.format.extent | 262616 bytes | - |
dc.format.mimetype | application/pdf | - |
dc.language.iso | en | - |
dc.publisher | Brunel University | en |
dc.subject | Option pricing; transaction costs; utility maximisation; singular | en |
dc.subject | stochastic control; Markov chain approximation | en |
dc.title | Option Pricing with Transaction Costs Using a Markov Chain Approximation | en |
dc.type | Research Paper | en |
Appears in Collections: | Dept of Economics and Finance Research Papers |
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