Option Hedging with Stochastic Volatility

22 Pages Posted: 23 Nov 2007 Last revised: 3 Apr 2009

See all articles by Adam Kurpiel

Adam Kurpiel

LARE-efi

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: December 8, 1998

Abstract

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

Kurpiel, Adam and Roncalli, Thierry, Option Hedging with Stochastic Volatility (December 8, 1998). Available at SSRN: https://ssrn.com/abstract=1031927 or http://dx.doi.org/10.2139/ssrn.1031927

Adam Kurpiel

LARE-efi ( email )

Avenue Leon Duguit, 33
Pessac, 608
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

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