TY - JOUR
T1 - Option pricing with transaction costs and stochastic volatility
AU - Florescu, Ionuţ
AU - Mariani, Maria C.
AU - Sengupta, Indranil
PY - 2014/7/30
Y1 - 2014/7/30
N2 - In a realistic market with transaction costs, the option pricing problem is known to lead to solving nonlinear partial differential equations even in the simplest model. The nonlinear term in these partial differential equations (PDE) reflects the presence of transaction costs. In this article we consider an underlying general stochastic volatility model. In this case the market is incomplete and the option price is not unique. Under a particular market completion assumption where we use a traded proxy for the volatility, we obtain a non-linear PDE whose solution provides the option price in the presence of transaction costs. This PDE is studied and under suitable regularity conditions, we prove the existence of strong solutions of the problem.
AB - In a realistic market with transaction costs, the option pricing problem is known to lead to solving nonlinear partial differential equations even in the simplest model. The nonlinear term in these partial differential equations (PDE) reflects the presence of transaction costs. In this article we consider an underlying general stochastic volatility model. In this case the market is incomplete and the option price is not unique. Under a particular market completion assumption where we use a traded proxy for the volatility, we obtain a non-linear PDE whose solution provides the option price in the presence of transaction costs. This PDE is studied and under suitable regularity conditions, we prove the existence of strong solutions of the problem.
KW - Financial market
KW - Nonlinear PDEs
KW - Stochastic volatility models
KW - Transaction costs models
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M3 - Article
AN - SCOPUS:84905248347
VL - 2014
JO - Electronic Journal of Differential Equations
JF - Electronic Journal of Differential Equations
ER -