EconPapers    
Economics at your fingertips  
 

Hedging Options in a GARCH Environment: Testing the Term Structure of Stochastic Volatility Models

Robert Engle and Joshua Rosenberg ()

No 4958, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P 500 index volatility. Volatility models are compared by their ability to hedge options positions sensitive to the term structure of volatility. Overall, the most effective hedge is a Black-Scholes (BS) delta-gamma hedge, while the BS delta-vega hedge is the least effective. The most successful volatility hedge is GARCH components delta-gamma, suggesting that the GARCH components estimate of the term structure of volatility is most accurate. The success of the BS delta-gamma hedge may be due to mispricing in the options market over the sample period.

Date: 1994-12
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Published as "Bayesian Analysis of Stochastic Volatility Models: Comment", JBES, Vol. 12, no. 4 (1994): 395-396.

Downloads: (external link)
http://www.nber.org/papers/w4958.pdf (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:nbr:nberwo:4958

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4958

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-08-20
Handle: RePEc:nbr:nberwo:4958