Option Hedging with Stochastic Volatility
22 Pages Posted: 23 Nov 2007 Last revised: 3 Apr 2009
Date Written: December 8, 1998
The purpose of this paper is to analyse different implications of the stochastic behavior of asset prices volatilities for option hedging purposes. We present a simple stochastic volatility model for option pricing and illustrate its consistency with financial stylized facts. Then, assuming a stochastic volatility environment, we study the accuracy of Black and Scholes implied volatility-based hedging. More precisely, we analyse the hedging ratios biases and investigate different hedging schemes in a dynamic setting.
Keywords: Option hedging, stochastic volatility, hedging simulation
JEL Classification: G00
Suggested Citation: Suggested Citation