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      An integer programming model for pricing American contingent claims under transaction costs

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      Author
      Pınar, M. Ç.
      Camcı, A.
      Date
      2012
      Source Title
      Computational Economics
      Print ISSN
      0927-7099
      Electronic ISSN
      1572-9974
      Volume
      39
      Issue
      1
      Pages
      1 - 12
      Language
      English
      Type
      Article
      Item Usage Stats
      153
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      990
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      Abstract
      We study the problem of computing the lower hedging price of an American contingent claim in a finite-state discrete-time market setting under proportional transaction costs. We derive a new mixed-integer linear programming formulation for calculating the lower hedging price. The linear programming relaxation of the formulation is exact in frictionless markets. Our results imply that it might be optimal for the holder of several identical American claims to exercise portions of the portfolio at different time points in the presence of proportional transaction costs while this incentive disappears in their absence.
      Keywords
      American Contingent Claims
      Dividends
      Hedging
      Incomplete Markets
      Martingales
      Mixed-integer Programming
      Pricing
      Transaction Costs
      Permalink
      http://hdl.handle.net/11693/21640
      Published Version (Please cite this version)
      http://dx.doi.org/10.1007/s10614-010-9209-z
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