European option pricing with transaction costs and stochastic volatility: An asymptotic analysis

R. E. Caflisch; G. Gambino; M. Sammartino; C. Sgarra

doi:10.1093/imamat/hxu033

European option pricing with transaction costs and stochastic volatility: An asymptotic analysis

R. E. Caflisch, G. Gambino, M. Sammartino, C. Sgarra

Mathematics

Research output: Contribution to journal › Article › peer-review

Abstract

In this paper, the valuation problem of a European call option in the presence of both stochastic volatility and transaction costs is considered. In the limit of small transaction costs and fast mean reversion, an asymptotic expression for the option price is obtained. While the dominant term in the expansion is shown to be the classical Black and Scholes solution, the correction terms appear at O(ε^1/2) and O(ε). The optimal hedging strategy is then explicitly obtained for Scott's model.

Original language	English (US)
Pages (from-to)	981-1008
Number of pages	28
Journal	IMA Journal of Applied Mathematics (Institute of Mathematics and Its Applications)
Volume	80
Issue number	4
DOIs	https://doi.org/10.1093/imamat/hxu033
State	Published - May 7 2014

Keywords

asymptotic analysis
option pricing
stochastic volatility
transaction costs

ASJC Scopus subject areas

Applied Mathematics

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10.1093/imamat/hxu033

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AU - Sgarra, C.

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European option pricing with transaction costs and stochastic volatility: An asymptotic analysis

Abstract

Keywords

ASJC Scopus subject areas

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