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Hedging error in Lévy models with a Fast Fourier Transform approach

Flavio Angelini and Marco Nicolosi

No 43/2008, Quaderni del Dipartimento di Economia, Finanza e Statistica from Università di Perugia, Dipartimento Economia

Abstract: We measure, in terms of expectation and variance, the cost of hedging a contingent claim when the hedging portfolio is re-balanced at a discrete set of dates. The basic point of the methodology is to have an integral representation of the payoff of the claim, in other words to be able to write the payoff as an inverse Laplace transform. The models under consideration belong to the class of Lévy models, like NIG, VG and Merton models. The methodology is implemented through the popular FFT algorithm, used by many financial institutions for pricing and calibration purposes. As applications, we analyze the effect of increasing the number of tradings and we make some robustness tests.

Keywords: Hedging; Lévy models; Fast Fourier Transform (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2008-02-01
References: Add references at CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: On the Effect of Skewness and Kurtosis Misspecification on the Hedging Error (2010) Downloads
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