Hedging under alternative stickiness assumptions: an empirical analysis for barrier options
Journal
Journal of Risk
ISSN
1465-1211
Type
journal article
Date Issued
2009-09-01
Author(s)
Abstract
In this study, we empirically analyze dynamic hedges of barrier options
in the local volatility model using more than five years of data on the
DAX, a major German equity index. The emphasis is on the comparison
of the hedge performance of different hedging strategies under alternative
stickiness assumptions on the dynamics of the implied volatility surface.
We compare sticky-strike, sticky-moneyness and local volatility-implied
(model-consistent) hedges for barrier options with a maturity of one and
two years. We find that sticky-strike performs best, with the choice of the
hedging strategy being a much more important factor for successful risk
management than the stickiness assumption
in the local volatility model using more than five years of data on the
DAX, a major German equity index. The emphasis is on the comparison
of the hedge performance of different hedging strategies under alternative
stickiness assumptions on the dynamics of the implied volatility surface.
We compare sticky-strike, sticky-moneyness and local volatility-implied
(model-consistent) hedges for barrier options with a maturity of one and
two years. We find that sticky-strike performs best, with the choice of the
hedging strategy being a much more important factor for successful risk
management than the stickiness assumption
Language
English
Keywords
hedging
stickiness assumptions
implied volatility
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Incisive Media
Publisher place
London
Volume
12
Number
1
Start page
53
End page
77
Pages
25
Subject(s)
Eprints ID
86927