Does hedging with implied volatility factors improve the hedging efficiency of barrier options?
Journal
The Journal of Risk Model Validation
ISSN
1753-9579
ISSN-Digital
1753-9587
Type
journal article
Date Issued
2009-04-01
Author(s)
Abstract
The price of a barrier option depends on the shape of the entire implied volatility surface which is a high-dimensional dynamic object. Barrier options are hence exposed to non-trivial volatility risk. We extract the key risk factors of implied volatility surface fluctuations by means of a semiparametric factor model. Based on the factors we define a practical hedging procedure within a local volatility framework. The hedging performance is evaluated using DAX index options.
Language
English
Keywords
vega hedging
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Risk Journals
Publisher place
London
Volume
3
Number
1
Start page
73
End page
92
Pages
20
Subject(s)
Eprints ID
86930