Local risk-minimization for Barndorff-Nielsen and Shephard models

DOI10.1007/S00780-017-0324-8zbMATH Open1378.91116arXiv1503.08589OpenAlexW1954684003MaRDI QIDQ522068FDOQ522068

Authors: Takuji Arai, Y. Imai, Ryoichi Suzuki 

Publication date: 13 April 2017

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

Abstract: We obtain explicit representations of locally risk-minimizing strategies of call and put options for the Barndorff-Nielsen and Shephard models, which are Ornstein--Uhlenbeck-type stochastic volatility models. Using Malliavin calculus for Levy processes, Arai and Suzuki (2015) obtained a formula for locally risk-minimizing strategies for Levy markets under many additional conditions. Supposing mild conditions, we make sure that the Barndorff-Nielsen and Shephard models satisfy all the conditions imposed in Arai and Suzuki (2015). Among others, we investigate the Malliavin differentiability of the density of the minimal martingale measure. Moreover, some numerical experiments for locally risk-minimizing strategies are introduced.

Full work available at URL: https://arxiv.org/abs/1503.08589

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zbMATH Keywords

Malliavin calculusstochastic volatility modelslocal risk-minimizationBarndorff-Nielsen and Shephard modelsLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic calculus of variations and the Malliavin calculus (60H07) Numerical methods (including Monte Carlo methods) (91G60)

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Cited In (9)

• Comparison of local risk minimization and delta hedging strategy for exponential Lévy models
• Hedging strategy for unit-linked life insurance contracts with self-exciting jump clustering
• Numerical analysis on local risk-minimization for exponential Lévy models
• Approximate option pricing formula for Barndorff-Nielsen and Shephard model
• Local risk-minimization for Barndorff-Nielsen and Shephard models with volatility risk premium
• Malliavin differentiability of indicator functions on canonical Lévy spaces
• Local risk-minimization under the benchmark approach
• Pricing and hedging of VIX options for Barndorff-Nielsen and Shephard models
• A Girsanov transformed Clark-Ocone-Haussmann type formula for \(L^1\)-pure jump additive processes and its application to portfolio optimization

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