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On the pricing of American contingent claims under transaction costs and multiple risky assets

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Listed:
  • Tang, Maoning
  • Qingxin, Meng
  • Bo, Wang

Abstract

This paper addresses the hedging problem of American Contingents Claims (ACCs) in the framework of continuous-time Itô models for financial market. The special feature of this paper is that in the financial market the investor has to face fixed and proportional transaction costs when trading multiple risky assets. By using the auxiliary martingale approach and extending the results of Cvitanic and Karatzas [Cvitanic J, Karatzas I. Hedging and portfolio optimization under transaction costs: a martingale approach. Math Finance 1996;6:135–65] on pricing European contingent with transaction costs in the single-stock market, an arbitrage-free interval [hlow,hup] is identified, and the end points are characterized by auxiliary martingales and stopping times in terms of auxiliary stochastic control problems. Here hup and hlow are so-called the upper hedging price and the lower hedging price.

Suggested Citation

  • Tang, Maoning & Qingxin, Meng & Bo, Wang, 2007. "On the pricing of American contingent claims under transaction costs and multiple risky assets," Chaos, Solitons & Fractals, Elsevier, vol. 31(2), pages 269-279.
    • Handle: RePEc:eee:chsofr:v:31:y:2007:i:2:p:269-279
    DOI: 10.1016/j.chaos.2005.09.062
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    References listed on IDEAS

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    1. Jakša Cvitanić & Ioannis Karatzas, 1996. "Hedging And Portfolio Optimization Under Transaction Costs: A Martingale Approach12," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 133-165, April.
    2. Y.M. Kabanov, 1999. "Hedging and liquidation under transaction costs in currency markets," Finance and Stochastics, Springer, vol. 3(2), pages 237-248.
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