Abstract
In this paper, we consider the problem of super-replication under portfolio constraints in a Markov framework. More specifically, we assume that the portfolio is restricted to lie in a convex subset, and we show that the super-replication value is the smallest function which lies above the Black-Scholes price function and which is stable for the so-called face lifting operator. A natural approach to this problem is the penalty approximation, which not only provides a constructive smooth approximation, but also a way to proceed analytically.
Original language | English (US) |
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Pages (from-to) | 311-330 |
Number of pages | 20 |
Journal | Asymptotic Analysis |
Volume | 41 |
Issue number | 3-4 |
State | Published - 2005 |
Keywords
- Hedging under portfolio constraints
- Penalization
- Viscosity solutions
ASJC Scopus subject areas
- General Mathematics