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  4. Does hedging with implied volatility factors improve the hedging efficiency of barrier options?
 
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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)
Borak, Szymon
Fengler, Matthias  
Härdle, Wolfgang K.
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
URL
https://www.alexandria.unisg.ch/handle/20.500.14171/76235
Subject(s)

economics

Division(s)

SEPS - School of Econ...

MS - Faculty of Mathe...

University of St.Gall...

Eprints ID
86930

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