Local Vega Index and Variance Reduction Methods

Hans‐Peter Bermin, Arturo Kohatsu‐Higa and Miquel Montero ()

Mathematical Finance, 2003, vol. 13, issue 1, 85-97

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.

Date: 2003
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