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Model risk adjusted hedge ratios

✍ Scribed by Carol Alexander; Andreas Kaeck; Leonardo M. Nogueira

Publisher: John Wiley and Sons
Year: 2009
Tongue: English
Weight: 277 KB
Volume: 29
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20406

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

Most option pricing models assume all parameters except volatility are fixed; yet they almost invariably change on re‐calibration. This article explains how to capture the model risk that arises when parameters that are assumed constant have calibrated values that change over time and how to use this model risk to adjust the price hedge ratios of the model. Empirical results demonstrate an improvement in hedging performance after the model risk adjustment. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1021–1049, 2009

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