Abstract
We incorporate a time-varying negative relationship for implied volatility and underlying price into the delta hedging problem, where traders aim to minimize the variance of changes in the value of an option position by trading an appropriate amount of the underlying asset. We show that volatility-price elasticity is mean-reverting and embed predictions of the elasticity in a hedge ratio model that incorporates the negative volatility-price relationship. Our tests show that when applied to index options data, the proposed approach improves hedging performance over methods that rely solely on the long-run mean of the volatility-price relationship.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
