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On Transaction-Cost Models in Continuous-Time Markets

Author

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  • Thomas Poufinas

    (Department of Economics, Democritus University of Thrace, Panepistimioupolis, Komotini 69100, Greece)

Abstract

Transaction-cost models in continuous-time markets are considered. Given that investors decide to buy or sell at certain time instants, we study the existence of trading strategies that reach a certain final wealth level in continuous-time markets, under the assumption that transaction costs, built in certain recommended ways, have to be paid. Markets prove to behave in manners that resemble those of complete ones for a wide variety of transaction-cost types. The results are important, but not exclusively, for the pricing of options with transaction costs.

Suggested Citation

  • Thomas Poufinas, 2015. "On Transaction-Cost Models in Continuous-Time Markets," IJFS, MDPI, vol. 3(2), pages 1-34, April.
    • Handle: RePEc:gam:jijfss:v:3:y:2015:i:2:p:102-135:d:48723
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    References listed on IDEAS

    as
    1. Adrian Buss & Bernard Dumas, 2019. "The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees," Journal of Finance, American Finance Association, vol. 74(2), pages 795-844, April.
    2. Poufinas, Thomas, 2008. "On the number of deviations of Geometric Brownian Motion with drift from its extreme points with applications to transaction costs," Statistics & Probability Letters, Elsevier, vol. 78(17), pages 3040-3046, December.
    3. Monoyios, Michael, 2004. "Option pricing with transaction costs using a Markov chain approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 28(5), pages 889-913, February.
    4. Damgaard, Anders, 2003. "Utility based option evaluation with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 667-700, February.
    5. Zakamouline, Valeri I., 2006. "European option pricing and hedging with both fixed and proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 30(1), pages 1-25, January.
    6. A. E. Whalley & P. Wilmott, 1997. "An Asymptotic Analysis of an Optimal Hedging Model for Option Pricing with Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 307-324, July.
    7. Safarian, Mher, 2014. "Hedging options including transaction costs in incomplete markets," Working Paper Series in Economics 56, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    8. Damgaard, Anders, 2006. "Computation of reservation prices of options with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 415-444, March.
    Full references (including those not matched with items on IDEAS)

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