BFS 2002 

Poster Presentation 
Ales Cerny
The paper gives a closedform dynamic programming solution to the discrete time meanvariance hedging problem with proportional transaction costs that can be easily implemented on a Markov chain. It then compares the performance of the dynamically optimal strategy with the Leland and BlackScholes hedging strategies for realistic (leptokurtic) return distribution and transaction costs. We find that the dynamically optimal strategy outperforms Leland strategy for high transaction costs (1%), but that the replication error of the best hedging strategy is very high. Furthermore, in terms of performance there is little difference between hedging once a day and once a week. On the theoretical level this paper generalizes and combines the analyses of Leland (1985) and Schweizer (1995).
http://www.ms.ic.ac.uk/acerny