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Static hedges for reverse barrier options with robustness against skew risk : an empirical analysis

Matthias Fengler, Jan H. Maruhn & Morten Nalholm

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abstract We conduct an empirical evaluation of a static super-replicating hedge of barrier options. The hedge is robust to uncertainty about the future skew. Using almost seven years of current data on the DAX, we evaluate the performance of the hedge and compare it with those of both a dynamic and a static replicating hedge. The main result is that the robustness of the static super-replicating portfolio is also empirically confirmed in practice such that the hedge sets an upper bound for the price of skew risk for barrier options.
   
type journal paper
   
keywords
   
language English
kind of paper journal article
date of appearance 1-5-2011
journal Quantitative Finance
publisher Taylor&Francis (London UK)
ISSN 1469-7688
ISSN (online) 1469-7696
DOI 10.1080/14697680903154241
volume of journal 11
number of issue 5
page(s) 711-727
review double-blind review
   
citation Fengler, M., Maruhn, J. H., & Nalholm, M. (2011). Static hedges for reverse barrier options with robustness against skew risk: an empirical analysis. Quantitative Finance, 11(5), 711-727, DOI:10.1080/14697680903154241.