On the pricing of American contingent claims under transaction costs and multiple risky assets

Maoning Tang*, Meng Qingxin, Wang Bo

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper addresses the hedging problem of American Contingents Claims (ACCs) in the framework of continuous-time Itô models for financial market. The special feature of this paper is that in the financial market the investor has to face fixed and proportional transaction costs when trading multiple risky assets. By using the auxiliary martingale approach and extending the results of Cvitanic and Karatzas [Cvitanic J, Karatzas I. Hedging and portfolio optimization under transaction costs: a martingale approach. Math Finance 1996;6:135-65] on pricing European contingent with transaction costs in the single-stock market, an arbitrage-free interval [hlow, hup] is identified, and the end points are characterized by auxiliary martingales and stopping times in terms of auxiliary stochastic control problems. Here hup and hlow are so-called the upper hedging price and the lower hedging price.

Original languageEnglish
Pages (from-to)269-279
Number of pages11
JournalChaos, Solitons and Fractals
Volume31
Issue number2
DOIs
Publication statusPublished - Jan 2007

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