Laplacian risk management

Dilip B. Madan, Robert H. Smith and King Wang

Finance Research Letters, 2017, vol. 22, issue C, 202-210

Abstract: Risk management is developed by using implied volatilities associated with a Laplacian base density as opposed to the normal distribution. Expressions are derived for all the Laplacian greeks. The Laplacian implied volatilities and greeks are compared with their Gaussian counterparts. Differences in hedges are illustrated by hedging long dated straddles using short maturity options. The Laplacian hedge delivers cash flows with a lower final variability in the case presented. The computation speed of Laplacian entities is also observed to be substantially faster as there are no calls to the cumnorm function.

Keywords: Local volatility; Compound Poisson; Theta; Gamma; Vega; Volga and vanna (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612316303877
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:finlet:v:22:y:2017:i:c:p:202-210

DOI: 10.1016/j.frl.2016.12.013

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).