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
Date Written: September 27, 2010
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: Suggested Citation