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Modified Leland's Strategy for a Constant Transaction Costs Rate

Lépinette, Emmanuel (2012), Modified Leland's Strategy for a Constant Transaction Costs Rate, Mathematical Finance, 22, 4, p. 741-752. http://dx.doi.org/10.1111/j.1467-9965.2011.00498.x

Type
Article accepté pour publication ou publié
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http://hal.archives-ouvertes.fr/hal-00603172/fr/
Date
2012
Nom de la revue
Mathematical Finance
Volume
22
Numéro
4
Éditeur
Wiley
Pages
741-752
Identifiant publication
Métadonnées
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Auteur(s)
Lépinette, Emmanuel
Résumé (EN)
In 1985 Leland suggested an approach to price contingent claims under proportional transaction costs. Its main idea is to use the classical Black-Scholes formula with a suitably adjusted volatility for a periodical revision of the portfolio whose terminal value approximates the pay-off. Unfortunately, if the transaction costs rate does not depend on the number of revisions, the approximation error does not converge to zero as the frequency of revisions tends to infinity. In the present paper, we suggest a modification of Leland's strategy ensuring that the approximation error vanishes in the limit.
Mots-clés
Leland's Strategy; Constant Transaction Costs Rate