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- Title
Auto-static for the people: risk-minimizing hedges of barrier options.
- Authors
Siven, Johannes; Poulsen, Rolf
- Abstract
We present and test a method for computing risk-minimizing static hedge strategies. The method is straightforward, yet flexible with respect to the type of contingent claim being hedged, the underlying asset dynamics, and the choice of risk-measure and hedge instruments. Extensive numerical comparisons for barrier options in a model with stochastic volatility and jumps show that the resulting hedges outperform previous suggestions in the literature. We also demonstrate that the risk-minimizing static hedges work in an infinite intensity Levy-driven model, and a number of controlled experiments illustrate that hedge performance is robust to model risk.
- Subjects
MARKET volatility; FINANCIAL risk; ARCH model (Econometrics); HEDGING (Finance); INFLATION risk
- Publication
Review of Derivatives Research, 2009, Vol 12, Issue 3, p193
- ISSN
1380-6645
- Publication type
Article
- DOI
10.1007/s11147-009-9040-7