Hedging under Stochastic Volatility
نویسنده
چکیده
We present a family of hedging strategies for a European derivative security in a stochastic volatility environment. The strategies are robust to speciication of the volatility process and do not need a parametric description of it or estimation of the volatility risk premium. They allow the hedger to control the probability of hedging success according to risk aversion. The formula exploits the separation between the time scale of asset price uctuation (ticks) and the longer time scale over which volatility uctuates, that is, the observed \persistence" of volatility. We run simulations that demonstrate the eeectiveness of the strategies over the classical Black-Scholes strategy.
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