Affordable Access

Efficient Option Replication in the Presence of Transactions Costs



In the presence of transaction costs, a risk-return trade-off exists between the quality and the cost of a replicating strategy. In that context, I show how to expand the set of all possible time-based strategies through the introduction of a multi-scale class of strategies, which consist in rebalancing different fractions of an option portfolio at different time frequencies. The method, based on time-scale diversification, is to dynamic replication what investment in diversified portfoliosis to static portfolio selection: in a dynamic context, one may enjoy the benefits of diversification by using different time scales in trading the same asset. Copyright Kluwer Academic Publishers 2000

There are no comments yet on this publication. Be the first to share your thoughts.


Seen <100 times