ELS pricing and hedging in a fractional Brownian motion environment

Seong-Tae Kim, Hyun-Gyoon Kim and Jeong-Hoon Kim

Chaos, Solitons & Fractals, 2021, vol. 142, issue C

Abstract: An equity-linked security (ELS) is a debt instrument with several payments and maturities linked to equity markets. This paper is a study of the pricing and hedging of the ELS when the underlying asset price moves in a geometric fractional Brownian motion environment. We develop two different methods for calibrating fractional implied volatility, obtain an empirical result on the Hurst exponent, and introduce a new Greek called Eta to find the sensitivity of the ELS price to the Hurst parameter. We propose three Delta hedging strategies and compare them with each other and the classical Black-Scholes Delta hedging strategy. Their performance is shown to depend on market circumstance (bull or bear). Our results with constant volatility and Hurst exponent provide a building basis for more stable hedging strategies in the non-Markov environment.

Keywords: Equity-linked security; Fractional Brownian motion; Pricing; Calibration; Delta hedging (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0960077920308456
Full text for ScienceDirect subscribers only

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:eee:chsofr:v:142:y:2021:i:c:s0960077920308456

DOI: 10.1016/j.chaos.2020.110453

Access Statistics for this article

Chaos, Solitons & Fractals is currently edited by Stefano Boccaletti and Stelios Bekiros

More articles in Chaos, Solitons & Fractals from Elsevier
Bibliographic data for series maintained by Thayer, Thomas R. ().