Understanding Delta-Hedged Option Returns in Stochastic Volatility Environments

Hiroshi Sasaki ()

Asia-Pacific Financial Markets, 2015, vol. 22, issue 2, 184 pages

Abstract: In this paper, we provide a novel representation of delta-hedged option returns in a stochastic volatility environment. The representation of delta-hedged option returns provided in this paper consists of two terms: volatility risk premium and parameter estimation risk. In an empirical analysis, we examine delta-hedged option returns based on the result of a historical simulation with the USD-JPY currency option market data from October 2003 to June 2010. We find that the delta-hedged option returns for OTM put options are strongly affected by parameter estimation risk as well as the volatility risk premium, especially in the post-Lehman shock period. Copyright Springer Japan 2015

Keywords: Delta-hedged option returns; Stochastic volatility; Parameter estimation risk; Volatility risk premium; Currency option; C; D; G (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10690-014-9198-3

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