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Option - Alloction funds- Transaction costs

Nader Trabelsi (nadertrabelsi2003***at***yahoo.fr)

Abstract: The present article studies the efficiency of a strategy, incorporating some options and seeking to super-duplicate a standard allocation policy. The replication strategy allows reducing transaction cost effects. The replication means optimizing two objective-functions: MSE (Mean-squared Errors) and WMSE (Weighted Mean-squared Errors). Tests on portfolio efficiency concern, at first time, a long-term investor with Out-The-Country options and strike prices are approximate by a multiplicative binomial tree. At second time, the empirical evidence poses the case of a short-term investment, on CAC40 index and VX6 options of terms 6 months. Results prove the presence of portfolios based on options and more efficient than an active allocation strategy. The optimal behavior of the economic agent is a function of the number and the type of options introduced in the optimization problem.

Keywords: Buy and Hold, Replication, cost, options.

Category 1: Applications -- OR and Management Sciences

Citation: Public Finance and Finance Engineering Research Centre IAE Nice - French.

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Entry Submitted: 04/18/2009
Entry Accepted: 04/18/2009
Entry Last Modified: 11/21/2013

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