Static hedges for reverse barrier options with robustness against skew risk: an empirical analysis

Jan Maruhn, Morten Nalholm and Matthias Fengler

Quantitative Finance, 2011, vol. 11, issue 5, 711-727

Abstract: We conduct an empirical evaluation of a static super-replicating hedge of barrier options. The hedge is robust to uncertainty about the future skew. Using almost seven years of current data on the DAX, we evaluate the performance of the hedge and compare it with those of both a dynamic and a static replicating hedge. The main result is that the robustness of the static super-replicating portfolio is also empirically confirmed in practice such that the hedge sets an upper bound for the price of skew risk for barrier options.

Keywords: Barrier options; Static hedging; Skew risk (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/14697680903154241

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