A general Multidimensional Monte Carlo Approach for Dynamic Hedging under stochastic volatility
From MaRDI portal
Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Monte Carlo methods (65C05) Numerical solutions to stochastic differential and integral equations (65C30) Numerical methods (including Monte Carlo methods) (91G60) Financial applications of other theories (91G80)
Abstract: In this work, we introduce a Monte Carlo method for the dynamic hedging of general European-type contingent claims in a multidimensional Brownian arbitrage-free market. Based on bounded variation martingale approximations for Galtchouk-Kunita-Watanabe decompositions, we propose a feasible and constructive methodology which allows us to compute pure hedging strategies w.r.t arbitrary square-integrable claims in incomplete markets. In particular, the methodology can be applied to quadratic hedging-type strategies for fully path-dependent options with stochastic volatility and discontinuous payoffs. We illustrate the method with numerical examples based on generalized Follmer-Schweizer decompositions, locally-risk minimizing and mean-variance hedging strategies for vanilla and path-dependent options written on local volatility and stochastic volatility models.
This page was built for publication: A general Multidimensional Monte Carlo Approach for Dynamic Hedging under stochastic volatility
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6243944)
