Poulsen, R., Schenk-Hoppe, K.-R. and Ewald, C.-O. (2009) Risk minimization in stochastic volatility models: model risk and empirical performance. Quantitative Finance, 9(6), pp. 693-704. (doi: 10.1080/14697680902852738)
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Abstract
In this paper the performance of locally risk-minimizing delta hedge strategies for European options in stochastic volatility models is studied from an experimental as well as from an empirical perspective. These hedge strategies are derived for a large class of diffusion-type stochastic volatility models, and they are as easy to implement as usual delta hedges. Our simulation results on model risk show that these risk-minimizing hedges are robust with respect to uncertainty and misconceptions about the underlying data generating process. The empirical study, which includes the US sub-prime crisis period, documents that in equity markets risk-minimizing delta hedges consistently outperform usual delta hedges by approximately halving the standard deviation of the profit-and-loss ratio.
Item Type: | Articles |
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Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Ewald, Professor Christian |
Authors: | Poulsen, R., Schenk-Hoppe, K.-R., and Ewald, C.-O. |
College/School: | College of Social Sciences > Adam Smith Business School > Economics |
Journal Name: | Quantitative Finance |
ISSN: | 1469-7688 |
ISSN (Online): | 1469-7696 |
Published Online: | 24 August 2009 |
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