Tracking errors from discrete hedging in exponential Lévy models
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Abstract: We analyze the errors arising from discrete readjustment of the hedging portfolio when hedging options in exponential Levy models, and establish the rate at which the expected squared error goes to zero when the readjustment frequency increases. We compare the quadratic hedging strategy with the common market practice of delta hedging, and show that for discontinuous option pay-offs the latter strategy may suffer from very large discretization errors. For options with discontinuous pay-offs, the convergence rate depends on the underlying Levy process, and we give an explicit relation between the rate and the Blumenthal-Getoor index of the process.
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Cites work
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Cited in
(21)- Local parametric analysis of hedging in discrete time
- Asymptotics for discrete time hedging errors under fractional Black-Scholes models
- Hedging strategies for discretely monitored Asian options under Lévy processes
- Asymptotically optimal discretization of hedging strategies with jumps
- A Stroock formula for a certain class of Lévy processes and applications to finance
- A discrete-time Clark-Ocone formula for Poisson functionals
- Optimality of payoffs in Lévy models
- Measuring the error of dynamic hedging: a Laplace transform approach
- A note on Malliavin fractional smoothness for Lévy processes and approximation
- Approximate indifference pricing in exponential Lévy models
- The tracking error rate of the delta-gamma hedging strategy
- Discrete-time quadratic hedging of barrier options in exponential Lévy model
- Construction and hedging of optimal payoffs in Lévy models
- \(L^2\)-convergence rate for the discretization error of functions of Lévy process
- Approximate Hedging with Constant Proportional Transaction Costs in Financial Markets with Jumps
- Hedging strategies for energy derivatives
- Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation
- On the performance of delta hedging strategies in exponential Lévy models
- OPTIMAL CONTINUOUS‐TIME HEDGING WITH LEPTOKURTIC RETURNS
- Discrete time hedging errors for options with irregular payoffs
- Approximation of stochastic integrals with jumps via weighted BMO approach
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