Simulated testing of nonparametric measure changes for hedging European options

Godfrey Smith

Finance Research Letters, 2013, vol. 10, issue 2, 93-101

Abstract: We test the accuracy and hedging performance of the deltas given by a range of nonparametric measure changes. The nonparametric models accurately estimate deltas across a number of asset price dynamics. The optimal nonparametric measure change displays superior estimation bias, which depends on how the models capture the stylised features of the dynamics, moneyness, and time-to-expiry. Differences in estimation error appear negligible. The optimal measure change produces superior static hedging outcomes compared to the Black–Scholes model. Differences in dynamic hedging outcomes are negligible.

Keywords: Nonparametric; Canonical option pricing; Delta hedging; Greeks (search for similar items in EconPapers)
JEL-codes: C14 C61 G12 G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:10:y:2013:i:2:p:93-101

DOI: 10.1016/j.frl.2012.11.002

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