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Replication and shortfall risk in a binomial model with transaction costs

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  • Barbara Trivellato

Abstract

The shortfall risk is defined as the optimal mean value of the terminal deficit produced by a self-financing portfolio whose initial value is smaller than what is required to replicate a contingent claim. In this paper we look for an explicit expression for it, as well as for the optimal strategy, when the market model is a binomial model with proportional transaction costs. We first study replication of European claims which satisfy suitable assumptions. We then investigate the shortfall minimization problem in a framework very similar to that without transaction costs. Copyright Springer-Verlag 2009

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  • Barbara Trivellato, 2009. "Replication and shortfall risk in a binomial model with transaction costs," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(1), pages 1-26, March.
    • Handle: RePEc:spr:mathme:v:69:y:2009:i:1:p:1-26
    DOI: 10.1007/s00186-007-0208-3
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    References listed on IDEAS

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