Price Systems for Markets with Transaction Costs and Control Problems for Some Finance Problems

In a market with transaction costs, the price of a derivative can be expressed in terms of (preconsistent) price systems (after Kusuoka (1995)). In this paper, we consider a market with binomial model for stock price and discuss how to generate the price systems. From this, the price formula of a de...

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Bibliographic Details
Published in:Lecture notes-monograph series 2006-01, Vol.52, p.257-271
Main Authors: Chiang, Tzuu-Shuh, Shiu, Shang-Yuan, Sheu, Shuenn-Jyi
Format: Article
Language:English
Subjects:
Binomials
Control theory
Expected utility
Market prices
Mathematics
Optimal strategies
Pricing
Related Topics
Stock sales
Stock shares
Transaction costs
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Summary:In a market with transaction costs, the price of a derivative can be expressed in terms of (preconsistent) price systems (after Kusuoka (1995)). In this paper, we consider a market with binomial model for stock price and discuss how to generate the price systems. From this, the price formula of a derivative can be reformulated as a stochastic control problem. Then the dynamic programming approach can be used to calculate the price. We also discuss optimization of expected utility using price systems.
ISSN:0749-2170
DOI:10.1214/074921706000001094