Evaluating Discrete Dynamic Strategies in Affine Models

Flavio Angelini and Stefano Herzel

No 71/2009, Quaderni del Dipartimento di Economia, Finanza e Statistica from Università di Perugia, Dipartimento Economia

Abstract: We consider the problem of measuring the performance of a dynamic strategy, rebalanced at a discrete set of dates, whose objective is that of replicating a claim in an incomplete market driven by a general multi-dimensional affine process. The main purpose of the paper is to propose a method to efficiently compute the expected value and variance of the hedging error of the strategy. Representing the pay-off the claim as an inverse Laplace transform, we are able to get semi-explicit formulas for strategies satisfying a certain property. The result is quite general and can be applied to a very rich class of models and strategies, including Delta hedging. We provide illustrations for the cases of interest rate models and Heston's stochastic volatility model.

Pages: 25 pages
Date: 2009-11-01
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Citations: View citations in EconPapers (8)

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Journal Article: Evaluating discrete dynamic strategies in affine models (2015)
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