Testing Derivatives Pricing Models under Higher-Order Moment Swaps

Studies in Economics and Finance, 2019, DOI: 10.1108/SEF-04-2018-0106

15 Pages Posted: 30 Apr 2019

Date Written: Octopber 21, 2018

Abstract

This paper aims to test three parametric models in pricing and hedging higher-order moment swaps. Using vanilla option prices from the volatility surface of the Euro Stoxx 50 Index, the paper shows that the pricing accuracy of these models is very satisfactory under four different pricing error functions. The result is that taking a position in a third moment swap considerably improves the performance of the standard hedge of a variance swap based on a static position in the log-contract and a dynamic trading strategy. The position in the third moment swap is taken by running a Monte Carlo simulation.

Keywords: Higher-Order Moment Swaps, Log-Contract, Static Position, Variance Swaps, Volatility Surface

JEL Classification: G12, G13

Suggested Citation

Doffou, Ako, Testing Derivatives Pricing Models under Higher-Order Moment Swaps (Octopber 21, 2018). Studies in Economics and Finance, 2019, DOI: 10.1108/SEF-04-2018-0106, Available at SSRN: https://ssrn.com/abstract=3361476

Ako Doffou (Contact Author)

Shantou University ( email )

School of Business
243 Da Xue Road
Shantou, Guangdong 515063
China
+86-754-86502882 (Phone)
+86-754-86503442 (Fax)

HOME PAGE: http://ssrn.com/author=245501

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