Density estimation through quasi-analytic Monte-Carlo simulation: Options arbitrage with transactions costs

Autor:	N.K. Chidambaran
Rok vydání:	2006
Předmět:	Transaction cost Options arbitrage Monte Carlo method Density estimation General Business Management and Accounting Microeconomics Corporate finance Accounting Economics Econometrics Arbitrage Volatility (finance) Moneyness Finance
Zdroj:	Review of Quantitative Finance and Accounting. 28:101-122
ISSN:	1573-7179 0924-865X
DOI:	10.1007/s11156-006-0005-8
Popis:	Discretely rebalanced options arbitrage strategies in the presence of transaction costs have path dependent returns that are difficult to model analytically. I instead use a quasi-analytic procedure that combines the computational efficiency of analytical solutions with the flexibility of simulations. The central feature is the estimation of the distribution of returns of the arbitrage strategy by mapping simulated returns percentiles and the input parameter set. Using the estimated density, I evaluate the tradeoff between transaction costs and risk exposure under generalized transaction costs structures that includes bid-ask spread and brokerage commission. I show that the optimal strategy depends on transaction costs, volatility, and option moneyness. Strategies such as rebalancing when the hedge ratio changes by 0.25, balances transaction costs and risk exposure, and can be optimal.
Databáze:	OpenAIRE
Externí odkaz:	https://explore.openaire.eu/search/publication?articleId=doi_________::99ca9e56189d82649bad7e86dbbda3b2 https://doi.org/10.1007/s11156-006-0005-8 Zobrazit plný text záznamu