On the performance of delta hedging strategies in exponential Lévy models

DOI10.1080/14697688.2013.779742zbMATH Open1281.91158arXiv0911.4859OpenAlexW2090750183MaRDI QIDQ5397451FDOQ5397451

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

Publication date: 20 February 2014

Published in: Quantitative Finance (Search for Journal in Brave)

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.

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

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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)

Cites Work

• A Jump-Diffusion Model for Option Pricing
• Processes of normal inverse Gaussian type
• On the structure of general mean-variance hedging strategies
• Option pricing when underlying stock returns are discontinuous
• 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
• On quadratic hedging in continuous time
• OPTIMAL CONTINUOUS‐TIME HEDGING WITH LEPTOKURTIC RETURNS

Cited In (9)

• Hedging With Linear Regressions and Neural Networks
• Comparison of local risk minimization and delta hedging strategy for exponential Lévy models
• Robustness of Delta Hedging for Path-Dependent Options in Local Volatility Models
• Rational hedging with a diversity of implied volatilities
• On the difference between locally risk-minimizing and delta hedging strategies for exponential Lévy models
• A note on delta hedging in markets with jumps
• Delta-hedging in fractional volatility models
• Evaluating discrete dynamic strategies in affine models
• Variance optimal hedging for continuous time additive processes and applications

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