Super-Replication with Fixed Transaction Costs

2016/10/28 by Bank, Peter, Dolinsky, Yan
#91G10 #91G20 #FOS: Economics and business #Mathematical Finance (q-fin.MF)

paper · doi:10.48550/arxiv.1610.09234

Abstract

We study super--replication of contingent claims in markets with fixed transaction costs. This can be viewed as a stochastic impulse control problem with a terminal state constraint. The first result in this paper reveals that in reasonable continuous time financial market models the super--replication price is prohibitively costly and leads to trivial buy--and--hold strategies. Our second result derives nontrivial scaling limits of super--replication prices for binomial models with small fixed costs.

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