Fairing the gamma: an engineering approach to sensitivity estimation

Wanmo Kang, Kyoung-Kuk Kim and Hayong Shin

IISE Transactions, 2014, vol. 46, issue 4, 374-396

Abstract: In the finance industry, obtaining stable estimates for sensitivities of derivatives to price changes in an underlying asset is very important from a practical point of view. However, this aim is often hindered by the absence of closed-form expressions for Greeks or the requirement of an excessive computational workload due to the complexities of various exotic derivative structures. However, ad hoc numerical schemes to produce stable Greeks such as nonlinear regression can result in nonsensical values. This article proposes a fairing algorithm designed for the computation of gamma values of exotic derivatives. Examples are presented at exotic derivatives to which the algorithm is applied and some analytical and numerical results are provided that show its usefulness in reducing the mean square error of gamma estimates.

Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/0740817X.2012.689125 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uiiexx:v:46:y:2014:i:4:p:374-396

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/uiie20

DOI: 10.1080/0740817X.2012.689125

Access Statistics for this article

IISE Transactions is currently edited by Jianjun Shi

More articles in IISE Transactions from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().