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Zero-level pricing method with transaction cost

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Abstract

In this research, we extend Luenberger’s (J Econ Dyn Contr 26(10), 1613–1628, 2002) results on zero-level pricing method to the market with transaction cost. We show that the zero-level price exists in this market. Both the zero-level pricing method and the no-arbitrage pricing method produce price intervals, but the zero-level price interval is smaller than the no-arbitrage price interval. Although the zero-level price interval in general depends on the utility function and initial wealth, we show the zero-level price interval is identical for all individuals with different levels of initial wealth and the HARA utility functions in which one parameter is fixed.

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Authors and Affiliations

  1. Department of Business Administration, Yuan Ze University, Taoyuan, Taiwan

    Sy-Ming Guu

  2. Department of Finance, Minghsin University of Science and Technology, Hsinchu, Taiwan

    Jying-Nan Wang

  3. Department of Finance, Da Yeh University, Changhua, Taiwan

    Sheng-Ching Wu

Authors
  1. Sy-Ming Guu
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  2. Jying-Nan Wang
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  3. Sheng-Ching Wu
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Correspondence to Sy-Ming Guu.

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Guu, SM., Wang, JN. & Wu, SC. Zero-level pricing method with transaction cost. Optim Lett 6, 375–392 (2012). https://doi.org/10.1007/s11590-011-0400-5

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  • DOI: https://doi.org/10.1007/s11590-011-0400-5

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