Please use this identifier to cite or link to this item:
Full metadata record
DC FieldValueLanguage
dc.contributor.authorMonoyios, M-
dc.identifier.citationEconomics and Finance Working papers, Brunel University, 01-03en
dc.description.abstractAn e cient algorithm is developed to price European options in the pres- ence of proportional transaction costs, using the optimal portfolio frame- work of Davis (1997). A fair option price is determined by requiring that an in nitesimal diversion of funds into the purchase or sale of options has a neutral e ect on achievable utility. This results in a general option pricing formula, in which option prices are computed from the solution of the investor's basic portfolio selection problem, without the need to solve a more complex optimisation problem involving the insertion of the op- tion payo into the terminal value function. Option prices are computed numerically using a Markov chain approximation to the continuous time singular stochastic optimal control problem, for the case of exponential utility. Comparisons with approximately replicating strategies are made. The method results in a uniquely speci ed option price for every initial holding of stock, and the price lie...en
dc.publisherBrunel Universityen
dc.titleOption Pricing with Transaction Costs Using a Markov Chain Approximationen
dc.typeWorking Paperen
Appears in Collections:Dept of Economics and Finance Research Papers

Files in This Item:
File Description SizeFormat 
01-03.pdf256.46 kBAdobe PDFView/Open

Items in BURA are protected by copyright, with all rights reserved, unless otherwise indicated.