A COMPARISON OF DELTA HEDGING UNDER TWO PRICE DISTRIBUTION ASSUMPTIONS BY LIKELIHOOD RATIO

Lingyan Cao and Zheng-Feng Guo

The International Journal of Business and Finance Research, 2012, vol. 6, issue 1, 25-34

Abstract: This paper compares net profits from delta hedging through the Delta of a European call option, by assuming underlying stock prices follows a geometric Brownian motion (GBM) or a Variance-Gamma (VG) process. We employ the maximum likelihood estimation method to estimate corresponding parameters for each process. A Monte Carlo simulation is conducted to simulate spot prices and option prices and a likelihood ratio (LR) method is used to estimate the Delta of the call option over different sample paths. We then implement a dynamic delta hedging strategy through the simulated spot prices, option prices and Delta at different hedging frequencies. Finally, we compare net profits calculated from hedging corresponding to a GBM or a VG process.

Keywords: likelihood ratio; Variance-Gamma; geometric Brownian motion; delta hedging (search for similar items in EconPapers)
JEL-codes: G13 G15 G17 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v6n1-2012/IJBFR-V6N1-2012-3.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ibf:ijbfre:v:6:y:2012:i:1:p:25-34

Access Statistics for this article

The International Journal of Business and Finance Research is currently edited by Terrance Jalbert

More articles in The International Journal of Business and Finance Research from The Institute for Business and Finance Research
Bibliographic data for series maintained by Mercedes Jalbert ( this e-mail address is bad, please contact ).