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Hedging under alternative stickiness assumptions: an empirical analysis for barrier options

Matthias Fengler, Bernd Engelmann & Peter Schwendner

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abstract In this study, we empirically analyze dynamic hedges of barrier options
in the local volatility model using more than five years of data on the
DAX, a major German equity index. The emphasis is on the comparison
of the hedge performance of different hedging strategies under alternative
stickiness assumptions on the dynamics of the implied volatility surface.
We compare sticky-strike, sticky-moneyness and local volatility-implied
(model-consistent) hedges for barrier options with a maturity of one and
two years. We find that sticky-strike performs best, with the choice of the
hedging strategy being a much more important factor for successful risk
management than the stickiness assumption
   
type journal paper
   
keywords hedging, stickiness assumptions, implied volatility
   
language English
kind of paper journal article
date of appearance 1-9-2009
journal Journal of Risk
publisher Incisive Media
ISSN 1465-1211
volume of journal 12
number of issue 1
page(s) 53-77
review double-blind review
   
citation Fengler, M., Engelmann, B., & Schwendner, P. (2009). Hedging under alternative stickiness assumptions: an empirical analysis for barrier options. Journal of Risk, 12(1), 53-77.