New Economics Papers
on Market Microstructure
Issue of 2013‒10‒02
two papers chosen by
Thanos Verousis

  1. Pricing and Hedging Derivative Securities with Unknown Local Volatilities By Kerry W. Fendick
  2. Modeling capital gains taxes for trading strategies of infinite variation By Christoph K\"uhn; Bj\"orn Ulbricht

  1. By: Kerry W. Fendick
    Abstract: A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the price dynamics of the underlying security over short time scales. Here we assume that traders have an objective knowledge about the underlying security's price trajectories only for large time scales. We show that avoidance of arbitrage that is still feasible uniquely determines the prices of options with large expiration times, and we derive limit theorems useful for estimation of model parameters and present-value analysis of derivative portfolios.
    Date: 2013–09
  2. By: Christoph K\"uhn; Bj\"orn Ulbricht
    Abstract: In this article we show that the payment flow of a linear tax on trading gains from a security with a semimartingale price process can be constructed for all c\`agl\`ad and adapted trading strategies. It is characterized as the unique continuous extension of the tax payments for elementary strategies w.r.t. the convergence "uniformly in probability". In this framework we prove that under quite mild assumptions dividend payoffs have almost surely a negative effect on investor's after-tax wealth if the riskless interest rate is always positive.
    Date: 2013–09

This issue is ©2013 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.