Dynamic Hedging Based on Fractional Order Stochastic Model with Memory Effect

Qing Li, Yanli Zhou, Xinquan Zhao and Xiangyu Ge

Mathematical Problems in Engineering, 2016, vol. 2016, 1-8

Abstract:

Many researchers have established various hedge models to get the optimal hedge ratio. However, most of the hedge models only discuss the discrete-time processes. In this paper, we construct the minimum variance model for the estimation of the optimal hedge ratio based on the stochastic differential equation. At the same time, also by considering memory effects, we establish the continuous-time hedge model with memory based on the fractional order stochastic differential equation driven by a fractional Brownian motion to estimate the optimal dynamic hedge ratio. In addition, we carry on the empirical analysis to examine the effectiveness of our proposed hedge models from both in-sample test and out-of-sample test.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:6817483

DOI: 10.1155/2016/6817483

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