Measuring the error of dynamic hedging: a Laplace transform approach

Flavio Angelini and Stefano Herzel

No 33/2007, Quaderni del Dipartimento di Economia, Finanza e Statistica from Università di Perugia, Dipartimento Economia

Abstract: We compute the expected value and the variance of the discretization error of delta hedging and of other strategies in the presence of proportional transaction costs. The method, based on Laplace transform, applies to a fairly general class of models, including Black-Scholes, Merton's jump-diffusion and Normal Inverse Gaussian. The results obtained are not asymptotical approximations but exact and efficient formulas, valid for any number of trading dates. They can also be employed under model mispecification, to measure the influence of model risk on a hedging strategy.

Keywords: hedging; Laplace transform (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Pages: 31
Date: 2007-08-01
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Citations: View citations in EconPapers (14)

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