Semi-Static Variance-Optimal Hedging in Stochastic Volatility Models with Fourier Representation

Paolo Di Tella, Martin Haubold and Martin Keller-Ressel

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Abstract: In a financial market model, we consider the variance-optimal semi-static hedging of a given contingent claim, a generalization of the classic variance-optimal hedging. To obtain a tractable formula for the expected squared hedging error and the optimal hedging strategy, we use a Fourier approach in a general multidimensional semimartingale factor model. As a special case, we recover existing results for variance-optimal hedging in affine stochastic volatility models. We apply the theory to set up a variance-optimal semi-static hedging strategy for a variance swap in both the Heston and the 3/2-model, the latter of which is a non-affine stochastic volatility model.

Date: 2017-09
New Economics Papers: this item is included in nep-rmg
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