On the performance of delta hedging strategies in exponential Lévy models

DOI10.1080/14697688.2013.779742MaRDI QIDQ5397451zbMATH OpenOpenAlexFDO

Authors Stephan Denkl, Martina Goy, Jan Kallsen, Johannes Muhle-Karbe, Arnd Pauwels

Publication date 20 February 2014

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0911.4859

zbMATH Keywords

model misspecificationmean-variance hedgingdelta hedgingLaplace transform approachLévy processesEuropean-style contingent claim

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Laplace transform (44A10)

Abstract: We consider the performance of non-optimal hedging strategies in exponential L'evy models. Given that both the payoff of the contingent claim and the hedging strategy admit suitable integral representations, we use the Laplace transform approach of Hubalek et al. (2006) to derive semi-explicit formulas for the resulting mean squared hedging error in terms of the cumulant generating function of the underlying L'evy process. In two numerical examples, we apply these results to compare the efficiency of the Black-Scholes hedge and the model delta to the mean-variance optimal hedge in a normal inverse Gaussian and a diffusion-extended CGMY L'evy model.

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Cites work

• A jump-diffusion model for option pricing
• OPTIMAL CONTINUOUS‐TIME HEDGING WITH LEPTOKURTIC RETURNS
• On quadratic hedging in continuous time
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• Option pricing when underlying stock returns are discontinuous
• Processes of normal inverse Gaussian type
• Quadratic hedging in affine stochastic volatility models
• The normal inverse gaussian lévy process: simulation and approximation
• Variance-optimal hedging for processes with stationary independent increments

Cited in

(20)

• Comparison of local risk minimization and delta hedging strategy for exponential Lévy models
• Hedging With Linear Regressions and Neural Networks
• OPTIMAL CONTINUOUS‐TIME HEDGING WITH LEPTOKURTIC RETURNS
• Construction and hedging of optimal payoffs in Lévy models
• Tracking errors from discrete hedging in exponential Lévy models
• Robustness of Delta Hedging for Path-Dependent Options in Local Volatility Models
• Adapted hedging
• Variance-optimal hedging for time-changed Lévy processes
• Delta hedging strategies comparison
• Discrete-time quadratic hedging of barrier options in exponential Lévy model
• Measuring the error of dynamic hedging: a Laplace transform approach
• On the difference between locally risk-minimizing and delta hedging strategies for exponential Lévy models
• Rational hedging with a diversity of implied volatilities
• Numerical analysis on quadratic hedging strategies for normal inverse Gaussian models
• A note on delta hedging in markets with jumps
• Delta-hedging in fractional volatility models
• Optimality of payoffs in Lévy models
• Evaluating discrete dynamic strategies in affine models
• Variance optimal hedging for continuous time additive processes and applications
• On the convergence of higher order hedging schemes: the delta-gamma case

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