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Risk minimization in stochastic volatility models: model risk and empirical performance
[Zeitschriftenartikel]
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 ... mehr
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 U.S. 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.... weniger
Klassifikation
Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Volkswirtschaftslehre
Freie Schlagwörter
Locally risk-minimizing delta hedge; Stochastic volatility; Model risk; Empirical hedge performance
Sprache Dokument
Englisch
Publikationsjahr
2009
Seitenangabe
S. 693-704
Zeitschriftentitel
Quantitative Finance, 9 (2009) 6
DOI
https://doi.org/10.1080/14697680902852738
Status
Postprint; begutachtet (peer reviewed)
Lizenz
PEER Licence Agreement (applicable only to documents from PEER project)