Nonparametric Malliavin–Monte Carlo Computation of Hedging Greeks

Maria Elvira Mancino and Simona Sanfelici
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Simona Sanfelici: Department of Economics and Management, University of Parma, 43125 Parma, Italy

Risks, 2020, vol. 8, issue 4, 1-17

Abstract: We propose a way to compute the hedging Delta using the Malliavin weight method. Our approach, which we name the λ -method, generally outperforms the standard Monte Carlo finite difference method, especially for discontinuous payoffs. Furthermore, our approach is nonparametric, as we only assume a general local volatility model and we substitute the volatility and the other processes involved in the Greek formula with quantities that can be nonparametrically estimated from a given time series of observed prices.

Keywords: Delta hedging; risk management; Monte Carlo simulation; Malliavin calculus; price-volatility feedback rate; nonparametric estimation; fourier analysis (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
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