Local risk-minimization for Barndorff-Nielsen and Shephard models (Q522068)

Local risk-minimization is a very well-known quadratic hedging method for contingent claims in incomplete financial markets. This paper is devoted to obtaining explicit representations of locally risk-minimizing (LRM) strategies for vanilla options in Barndorff-Nielsen and Shephard (BNS) models. The starting point fo this work is the previous result by the first and third author [``Local risk minimization for Lévy markets'', Int. J. Financ. Eng. 2, Article ID 1550015 (2015; \url{doi:10.1142/S2424786315500152})], where, by means of Malliavin calculus for Lévy processes, a formula for locally risk-minimizing strategies was obtained. More precisely, the authors prove that, under some mild conditions, these models satisfy the hypotheses required in [loc. cit.] and they use these previous results to obtaining the corresponding explicit representations of the LRM strategies. Moreover, a numerical scheme is proposed and the results are compared with the corresponding delta-hedging strategies. Numerical examples are given.