Local Vega Index and Variance Reduction Methods

13 Pages Posted: 20 Mar 2003

See all articles by Hans-Peter Bermin

Hans-Peter Bermin

Lund University, Department of Economics

Arturo Kohatsu-Higa

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Miquel Montero

University of Barcelona - Departament de Física de la Matèria Condensada

Abstract

In this article we discuss a generalization of the Greek called vega which is used to study the stability of option prices and hedging portfolios with respect to the volatility in various models. We call this generalization the local vega index. We compute through Monte Carlo simulations this index in the cases of Asian options under the classical Black-Scholes setup. Simulation methods using Malliavin calculus and kernel density estimation are compared. Variance reduction methods are discussed.

Keywords: Option Sensitivity, Volatility Structure

Suggested Citation

Bermin, Hans-Peter and Kohatsu-Higa, Arturo and Montero, Miquel, Local Vega Index and Variance Reduction Methods. Mathematical Finance, Vol. 13, pp. 85-97, 2003. Available at SSRN: https://ssrn.com/abstract=371400

Hans-Peter Bermin (Contact Author)

Lund University, Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

Arturo Kohatsu-Higa

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 50 (Phone)
(34-93) 542 17 46 (Fax)

Miquel Montero

University of Barcelona - Departament de Física de la Matèria Condensada ( email )

Martí i Franquès, 1
Barcelona, Catalonia 08028
Spain
+34 93 403 92 53 (Phone)
+34 93 402 11 55 (Fax)

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