Numerical Comparison of Local Risk-Minimisation & Mean-Variance Hedging

David Heath, Eckhard Platen () and Martin Schweizer

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper provides comparative results on prices, hedging strategies and risks for local risk-minimisation and mean-variance hedging for a class of stochastic volatility models. A pricing and hedging framework is presented for both approaches with detailed analysis undertaken for the well-known Heston and Stein/Stein stochastic volatility models. These illustrate important quantitative differences between the two approaches.

Keywords: incomplete markets; option pricing; hedging; local risk-minimization; mean-variance hedging; stochastic volatility; PDE and simulation methods (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2001-01-01
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Citations: View citations in EconPapers (12)

Published in: Heath, D. P., Platen, E. and Schweizer, M., 2001, "Numerical Comparison of Local Risk-Minimisation & Mean-Variance Hedging", In: Jouini, E, Cvitanic, J & Musiela, M (eds), Handbooks in Mathematical Finance: Option Pricing, Interest Rates and Risk Management, Cambridge University Press, Cambridge, UK, pp. 509-537

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