Feedback e¤ects of dynamic hedging strategies in the presence of transaction costs
نویسندگان
چکیده
We study the destabilising e¤ect of dynamic hedging strategies on the price of the underlying in the presence of sunk costs of transaction. Once sunk costs of transaction are taken into account, continuous portfolio rehedging is no longer an optimal strategy. Using a non-optimising (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying are derived, focusing in particular on the excess volatility and feedback e¤ects of these portfolio insurance strategies. Further, we show how these latter depend on the heterogeneity of the insured payo¤s. Finally, conditions are derived under which it may still be reasonable, from a practical viewpoint, to implement Black Scholes strategies. J.E.L. Classi...cation numbers: G10, G11, G12.
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