Quadratic hedging schemes for non-Gaussian GARCH models

Alexandru Badescu, Robert J. Elliott and Juan-Pablo Ortega

Papers from arXiv.org

Abstract: We propose different schemes for option hedging when asset returns are modeled using a general class of GARCH models. More specifically, we implement local risk minimization and a minimum variance hedge approximation based on an extended Girsanov principle that generalizes Duan's (1995) delta hedge. Since the minimal martingale measure fails to produce a probability measure in this setting, we construct local risk minimization hedging strategies with respect to a pricing kernel. These approaches are investigated in the context of non-Gaussian driven models. Furthermore, we analyze these methods for non-Gaussian GARCH diffusion limit processes and link them to the corresponding discrete time counterparts. A detailed numerical analysis based on S&P 500 European Call options is provided to assess the empirical performance of the proposed schemes. We also test the sensitivity of the hedging strategies with respect to the risk neutral measure used by recomputing some of our results with an exponential affine pricing kernel.

Date: 2012-09, Revised 2013-12
New Economics Papers: this item is included in nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1209.5976 Latest version (application/pdf)

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:arx:papers:1209.5976

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().