An Empirical Comparison of Two Stochastic Volatility Models using Indian Market Data

Srikanth Iyer (), Seema Nanda () and Swapnil Kumar

Asia-Pacific Financial Markets, 2013, vol. 20, issue 3, 243-259

Abstract: We conduct an empirical comparison of hedging strategies for two different stochastic volatility models proposed in the literature. One is an asymptotic expansion approach and the other is the risk-minimizing approach applied to a Markov-switched geometric Brownian motion. We also compare these with the Black–Scholes delta hedging strategies using historical and implied volatilities. The derivatives we consider are European call options on the NIFTY index of the Indian National Stock Exchange. We compare a few cases with profit and loss data from a trading desk. We find that for the cases that we analyzed, by far the better results are obtained for the Markov-switched geometric Brownian motion. Copyright Springer Science+Business Media New York 2013

Keywords: Option pricing; Stochastic volatility; Mean reverting; Regime switching; Risk minimizing; C02; C90; G13 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10690-013-9166-3

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