Abstract: We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their "distance" to a reference local volatility model. In the limit for small uncertainty aversion, this leads to explicit formulas for prices and hedging strategies in terms of the security's cash gamma.
Recommendations
- Model uncertainty, recalibration, and the emergence of delta-vega hedging
- Hedging under stochastic volatility
- Pricing and hedging derivative securities in markets with uncertain volatilities
- PARTIAL HEDGING IN A STOCHASTIC VOLATILITY ENVIRONMENT
- Indifference Pricing and Hedging for Volatility Derivatives
Cites work
- scientific article; zbMATH DE number 1713116 (Why is no real title available?)
- scientific article; zbMATH DE number 3664138 (Why is no real title available?)
- scientific article; zbMATH DE number 3778409 (Why is no real title available?)
- scientific article; zbMATH DE number 51724 (Why is no real title available?)
- scientific article; zbMATH DE number 3637702 (Why is no real title available?)
- scientific article; zbMATH DE number 4125214 (Why is no real title available?)
- scientific article; zbMATH DE number 1515832 (Why is no real title available?)
- scientific article; zbMATH DE number 3233089 (Why is no real title available?)
- A model-free version of the fundamental theorem of asset pricing and the super-replication theorem
- A stochastic control approach to no-arbitrage bounds given marginals, with an application to lookback options
- A theoretical framework for the pricing of contingent claims in the presence of model uncertainty
- Ambiguity Aversion, Robustness, and the Variational Representation of Preferences
- An Asymptotic Analysis of an Optimal Hedging Model for Option Pricing with Transaction Costs
- Approximation for option prices under uncertain volatility
- Arbitrage and duality in nondominated discrete-time models
- Calibrating volatility surfaces via relative-entropy minimization
- Combinatorial implications of nonlinear uncertain volatility models: the case of barrier options
- Conservative delta hedging.
- EVALUATING HEDGING ERRORS: AN ASYMPTOTIC APPROACH
- Financial options and statistical prediction intervals
- MODEL UNCERTAINTY AND ITS IMPACT ON THE PRICING OF DERIVATIVE INSTRUMENTS
- Managing the volatility risk of portfolios of derivative securities: the Lagrangian uncertain volatility model
- Martingale optimal transport and robust hedging in continuous time
- Maxmin expected utility with non-unique prior
- Misspecified asset price models and robust hedging strategies
- Model uncertainty, recalibration, and the emergence of delta-vega hedging
- Model-independent bounds for option prices -- a mass transport approach
- Model-independent hedging strategies for variance swaps
- On the robust superhedging of measurable claims
- On the value of stochastic differential games
- Optimal hedging strategies for misspecified asset price models
- Optimal investment for worst-case crash scenarios: a martingale approach
- Option pricing and hedging with small transaction costs
- Pricing and hedging derivative securities in markets with uncertain volatilities
- Probabilistic aspects of finance
- Random \(G\)-expectations
- Robust bounds for forward start options
- Robust hedging of barrier options.
- Robust hedging of double touch barrier options
- Robust hedging of the lookback option
- Robust price bounds for the forward starting straddle
- Robust pricing and hedging of double no-touch options
- Robust pricing-hedging dualities in continuous time
- Robustness
- Robustness of the Black and Scholes Formula
- Superreplication in stochastic volatility models and optimal stopping
- Superreplication under model uncertainty in discrete time
- Superreplication under volatility uncertainty for measurable claims
- The Skorokhod embedding problem and model-independent bounds for option prices
- The interpolation of options
- Two person zero-sum game in weak formulation and path dependent Bellman-Isaacs equation
- Uncertain volatility and the risk-free synthesis of derivatives
- Volatility misspecification, option pricing and superreplication via coupling
- When is time continuous?
Cited in
(11)- Pricing and hedging derivative securities in markets with uncertain volatilities
- An expansion in the model space in the context of utility maximization
- Allais, Ellsberg, and preferences for hedging
- Event risk, contingent claims and the temporal resolution of uncertainty
- Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
- Model uncertainty, recalibration, and the emergence of delta-vega hedging
- Adapted Wasserstein distances and stability in mathematical finance
- Effects of uncertainty aversion on the call option market
- Portfolio optimization with ambiguous correlation and stochastic volatilities
- A risk-neutral equilibrium leading to uncertain volatility pricing
- Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model
This page was built for publication: Hedging with small uncertainty aversion
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q503389)
