Duality and convergence for binomial markets with friction

We prove limit theorems for the super-replication cost of European options in a binomial model with friction. Examples covered are markets with proportional transaction costs and illiquid markets. A dual representation for the super-replication cost in these models is obtained and used to prove the limit theorems. In particular, the existence of a liquidity premium for the continuous-time limit of the model proposed in Çetin et al. (Finance Stoch. 8:311–341, <CitationRef CitationID="CR5">2004</CitationRef>) is proved. Hence, this paper extends the previous convergence result of Gökay and Soner (Math Finance 22:250–276, <CitationRef CitationID="CR13">2012</CitationRef>) to the general non-Markovian case. Moreover, the special case of small transaction costs yields, in the continuous limit, the G-expectation of Peng as earlier proved by Kusuoka (Ann. Appl. Probab. 5:198–221, <CitationRef CitationID="CR16">1995</CitationRef>). Copyright Springer-Verlag 2013