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Static versus Dynamic Hedges: An Empirical Comparison for Barrier Options

Matthias Fengler, Bernd Engelmann, Morten Nalholm & Peter Schwendner

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abstract We conduct an empirical comparison of static versus dynamic hedges of barrier options. Using more than five years of data, we compare a number of static hedges from the literature with dynamic hedges based on the local volatility model. The main result is that the variability of profit-and-loss distributions from certain static hedges is significantly smaller than that of dynamic hedges and robust to changing market scenarios. Furthermore, these static hedges are able to provide a robust tracking of barrier options’ sensitivities.
   
type journal paper
   
keywords Barrier Options, Static hedging, Dynamic hedging, Local volatility model, Empirical hedging Analysis, G13
   
language English
kind of paper journal article
date of appearance 1-1-2006
journal Review of Derivatives Research
publisher Springer Science+Business Media, LLC
ISSN 1380-6645
DOI 10.1007/s11147-007-9010-x
volume of journal 9
number of issue 3
page(s) 239-264
review double-blind review
   
citation Fengler, M., Engelmann, B., Nalholm, M., & Schwendner, P. (2006). Static versus Dynamic Hedges: An Empirical Comparison for Barrier Options. Review of Derivatives Research, 9(3), 239-264, DOI:10.1007/s11147-007-9010-x.