Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Dynamic hedging with a deterministic local volatility function model
Thomas F. Coleman, Yohan Kim, Yuying Li, Arun Verma
Abstract
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.
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Copyright Infopro Digital Limited. All rights reserved.
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