Journal of Risk

Risk.net

Dynamic hedging with a deterministic local volatility function model

Thomas F. Coleman, Yohan Kim, Yuying Li, Arun Verma

ABSTRACT

Estimation of a consistent volatility model of the underlying is crucial for option hedging. The authors illustrate that, compared to the implied/constant volatility method, a local volatility function method can estimate the underlying volatility from option prices more consistently. The result is more accurate hedge parameters and smaller hedging errors. The evidence provided includes an example where the underlying follows an absolute diffusion process, data from both the S&P 500 Index option market, and the S&P 500 futures option market.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: