Modelling the effect of transactions costs on options-related trading frequency

Abstract

In this paper we examine the relationship between transactions costs and options-related trading fre-quency. We develop a model which enables us to examine option hedging behaviour through any set of asset price and time paths, including large price changes in small time intervals, within a Black-Scholes numerical solution set. This approach allows for a type of completeness that is not possible with a binomial tree or Monte Carlo simulation. Our model suggests a linear relationship between transactions costs and trading frequency.