Local volatility models are popular because they can be simply calibrated to the market of European options. For such models, we propose a modified Leland method which allows us to approximately replicate a European contingent claim when the market is under proportional transaction costs. The...

This paper proposes rules for the control of interbank rate volatility under different interest corridor systems when volatility stems from interbank market frictions. Friction-induced volatility will occur if there is heterogeneity in two dimensions (across banks and time) with respect to the...