On the Performance of Asymptotic Locally Risk Minimizing Hedges in the Heston Stochastic Volatility Model

37 Pages Posted: 23 Sep 2010 Last revised: 28 Sep 2011

See all articles by Sai Hung Marten Ting

Sai Hung Marten Ting

The University of Sydney

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Date Written: September 27, 2010

Abstract

This paper investigates the use of the asymptotic Heston solution in locally risk minimizing hedging. The asymptotic Heston solution is presented along with issues that are relevant to its use. Comparison between the exact and asymptotic Heston hedges are made using both simulated and real historical data. The asymptotic Heston hedge is found to be a viable alternative to the exact hedge. It provides a means for faster calculation, while performing as well as the exact Heston hedge in the locally risk minimizing framework.

Keywords: Locally risk-minimizing hedging, stochastic volatility, asymptotic solutions, model risk, empirical hedging performance

JEL Classification: C90, G13

Suggested Citation

Ting, Sai Hung Marten and Ewald, Christian-Oliver, On the Performance of Asymptotic Locally Risk Minimizing Hedges in the Heston Stochastic Volatility Model (September 27, 2010). Available at SSRN: https://ssrn.com/abstract=1681252 or http://dx.doi.org/10.2139/ssrn.1681252

Sai Hung Marten Ting

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Christian-Oliver Ewald (Contact Author)

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

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