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Small transaction cost asymptotics and dynamic hedging

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Title: Small transaction cost asymptotics and dynamic hedging
Authors: Albanese, Claudio1 claudio.albanese@imperial.ac.uk, Tompaidis, Stathis2 stathis.tompaidis@mccombs.utexas.edu
Source: European Journal of Operational Research. Mar2008, Vol. 185 Issue 3, p1404-1414. 11p.
Subjects: Operations research, Philosophy of science, Systems theory, Industrial engineering
Abstract: Abstract: Transaction costs are one of the major impediments to the implementation of dynamic hedging strategies. We consider an alternative to utility maximization, similar to the “good-deal” pricing framework in incomplete markets. We perform a dynamic risk–reward analysis for a family of non-self-financing strategies of practical importance: deterministic time hedging; i.e., hedging at predetermined, fixed, times. In the limit of small relative transaction costs, we carry out the asymptotic analysis and find that transaction costs affect the hedge ratios and that the time between trades is related in a simple way to the local sensitivities of the replication target. [Copyright &y& Elsevier]
Copyright of European Journal of Operational Research is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
Database: Engineering Source
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Header DbId: egs
DbLabel: Engineering Source
An: 26995256
AccessLevel: 6
PubType: Academic Journal
PubTypeId: academicJournal
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  Data: Small transaction cost asymptotics and dynamic hedging
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  Data: <searchLink fieldCode="AR" term="%22Albanese%2C+Claudio%22">Albanese, Claudio</searchLink><relatesTo>1</relatesTo><i> claudio.albanese@imperial.ac.uk</i><br /><searchLink fieldCode="AR" term="%22Tompaidis%2C+Stathis%22">Tompaidis, Stathis</searchLink><relatesTo>2</relatesTo><i> stathis.tompaidis@mccombs.utexas.edu</i>
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  Data: Abstract: Transaction costs are one of the major impediments to the implementation of dynamic hedging strategies. We consider an alternative to utility maximization, similar to the “good-deal” pricing framework in incomplete markets. We perform a dynamic risk–reward analysis for a family of non-self-financing strategies of practical importance: deterministic time hedging; i.e., hedging at predetermined, fixed, times. In the limit of small relative transaction costs, we carry out the asymptotic analysis and find that transaction costs affect the hedge ratios and that the time between trades is related in a simple way to the local sensitivities of the replication target. [Copyright &y& Elsevier]
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  Data: <i>Copyright of European Journal of Operational Research is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract.</i> (Copyright applies to all Abstracts.)
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        Value: 10.1016/j.ejor.2004.08.049
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      – SubjectFull: Systems theory
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