A general multidimensional Monte Carlo approach for dynamic hedging under stochastic volatility (Q274837)

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scientific article; zbMATH DE number 6573007
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    A general multidimensional Monte Carlo approach for dynamic hedging under stochastic volatility
    scientific article; zbMATH DE number 6573007

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      A general multidimensional Monte Carlo approach for dynamic hedging under stochastic volatility (English)
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      25 April 2016
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      Summary: We propose a feasible and constructive methodology which allows us to compute \textit{pure hedging strategies} with respect to arbitrary square-integrable claims in incomplete markets. In contrast to previous works based on PDE and BSDE methods, the main merit of our approach is the flexibility of quadratic hedging in full generality without a priori smoothness assumptions on the payoff. In particular, the methodology can be applied to multidimensional quadratic hedging-type strategies for fully path-dependent options with stochastic volatility and discontinuous payoffs. In order to demonstrate that our methodology is indeed applicable, we provide a Monte Carlo study on generalized Föllmer-Schweizer decompositions, locally risk minimizing, and mean variance hedging strategies for vanilla and path-dependent options written on local volatility and stochastic volatility models.
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      dynamic hedging
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      stochastic volatility
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      multidimensional Monte Carlo method
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