Minimizing Transaction Costs of Option Hedging Strategies

Grannan, Eric; Swindle, Glen

doi:10.1111/j.1467-9965.1996.tb00121.x

Cited by 59 publications

(32 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…8 See, for example, Duffie and Jackson (1990), Schweizer (1992Schweizer ( , 1995Schweizer ( , 1996, Schäl (1994), Delbaen and Schachermeyer (1996) and Bertsimas et al (2000a). 9 See Leland (1985), Hodges and Neuberger (1989), Bensaid et al (1992), Boyle and Vorst (1992), Davis et al (1993), Edirisinghe et al (1993), Henrotte (1993), Avellaneda and Paras (1994), Neuberger (1994), Whalley and Wilmott (1994), Grannan and Swindle (1996) and Toft (1996). interest-rate stabilization policy.…”

Section: Literature Reviewmentioning

confidence: 99%

Asset allocation and derivatives

Haugh¹,

Lo²

2001

Quantitative Finance

View full text Add to dashboard Cite

The fact that derivative securities are equivalent to specific dynamic trading strategies in complete markets suggests the possibility of constructing buy-and-hold portfolios of options that mimic certain dynamic investment policies, e.g. asset-allocation rules. We explore this possibility by solving the following problem: given an optimal dynamic investment policy, find a set of options at the start of the investment horizon which will come closest to the optimal dynamic investment policy. We solve this problem for several combinations of preferences, return dynamics and optimality criteria, and show that under certain conditions, a portfolio consisting of just a few options is an excellent substitute for considerably more complex dynamic investment policies.

show abstract

Section: Literature Reviewmentioning

confidence: 99%

Asset allocation and derivatives

Haugh¹,

Lo²

2001

Quantitative Finance

View full text Add to dashboard Cite

show abstract

“…A comparison of OBPI 2 Transaction costs can naturally explain the reason for discrete-time hedging. The implication of transaction costs, conducted by Leland (1985), is studied in Bensaid, Lesne, and Scheinkman (1992), Boyle and Vorst (1992), Avellaneda and Parás (1994), Grannan and Swindle (1996) and Toft (1996).…”

mentioning

confidence: 99%

Effectiveness of CPPI Strategies under Discrete-Time Trading

Balder

Brandl

Mahayni³

2006

SSRN Journal

View full text Add to dashboard Cite

Abstract.The paper analyzes the effectiveness of the constant proportion portfolio insurance (CPPI) method under trading restrictions. If the CPPI method is applied in continuous time, the CPPI strategies provide a value above a floor level unless the price dynamic of the risky asset permits jumps. The risk of violating the floor protection is called gap risk. In practice, it is caused by liquidity constraints and price jumps. Both can be modelled in a setup where the price dynamic of the risky asset is described by a continuous-time stochastic process but trading is restricted to discrete time. We propose a discrete-time version of the continuous-time CPPI strategies which satisfies three conditions. The resulting strategies are self-financing, the asset exposure is non-negative and the value process converges. We determine risk measures such as the shortfall probability and the expected shortfall and discuss criteria which ensure that the gap risk does not increase to a level which contradicts the original intention of portfolio insurance. JEL: G11, G12Keywords: Portfolio insurance, discrete-time trading, return guarantees, gap risk, volatility risk. EFFECTIVENESS OF CPPI STRATEGIES UNDER DISCRETE-TIME TRADINGAbstract. The paper analyzes the effectiveness of the constant proportion portfolio insurance (CPPI) method under trading restrictions. If the CPPI method is applied in continuous time, the CPPI strategies provide a value above a floor level unless the price dynamic of the risky asset permits jumps. The risk of violating the floor protection is called gap risk. In practice, it is caused by liquidity constraints and price jumps. Both can be modelled in a setup where the price dynamic of the risky asset is described by a continuous-time stochastic process but trading is restricted to discrete time. We propose a discrete-time version of the continuous-time CPPI strategies which satisfies three conditions. The resulting strategies are self-financing, the asset exposure is nonnegative and the value process converges. We determine risk measures such as the shortfall probability and the expected shortfall and discuss criteria which ensure that the gap risk does not increase to a level which contradicts the original intention of portfolio insurance.

show abstract

“…Then, say, a deterministic but non-equidistant partition may be used to approximate X α . See Grannan and Swindle [6] or Denis and Kabanov [3]. Then the problem is to find an optimal α, which will depend on the payoff function f .…”

Section: Introductionmentioning

confidence: 99%