Evaluating discrete dynamic strategies in affine models

Flavio Angelini and Stefano Herzel

Quantitative Finance, 2015, vol. 15, issue 2, 313-326

Abstract: We consider the problem of measuring the performance of a dynamic strategy, re-balanced at a discrete set of dates, with the objective of hedging a claim in an incomplete market driven by a general multi-dimensional affine process. The main purpose of the paper is to propose a method to efficiently compute the expected value and variance of the hedging error of the strategy. Representing the payoff of the claim as an inverse Laplace transform, we are able to obtain semi-explicit formulas for strategies satisfying a certain property. The result is quite general and can be applied to a very rich class of models and strategies, including Delta hedging. We provide illustrations for the case of the Heston stochastic volatility model.

Date: 2015
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Working Paper: Evaluating Discrete Dynamic Strategies in Affine Models (2009)
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DOI: 10.1080/14697688.2011.637075

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