Hedging with small uncertainty aversion

DOI10.1007/S00780-016-0309-ZzbMATH Open1360.91141arXiv1605.06429OpenAlexW3122646574MaRDI QIDQ503389FDOQ503389

Sebastian Herrmann, Frank Thomas Seifried, Johannes Muhle-Karbe

Publication date: 12 January 2017

Published in: Finance and Stochastics (Search for Journal in Brave)

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.

Full work available at URL: https://arxiv.org/abs/1605.06429

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zbMATH Keywords

asymptoticsambiguity aversionvolatility uncertaintyoption pricing and hedging

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Utility theory (91B16) Optimal stochastic control (93E20)

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Cited In (9)

• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
• Effects of uncertainty aversion on the call option market
• Model uncertainty, recalibration, and the emergence of delta-vega hedging
• An expansion in the model space in the context of utility maximization
• Portfolio optimization with ambiguous correlation and stochastic volatilities
• Adapted Wasserstein distances and stability in mathematical finance
• Allais, Ellsberg, and preferences for hedging
• A risk-neutral equilibrium leading to uncertain volatility pricing
• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model

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