Numerical experiments on hedging cliquet options

Fiodar  Kilin; Morten Nalholm; Uwe Wystup

Numerical experiments on hedging cliquet options

Fiodar Kilin, Morten Nalholm, Uwe Wystup

Institut for Matematiske Fag

Abstract

In this paper, we conduct pricing and hedging experiments in order to check whether simple stochastic volatility models are capable of capturing forward volatility and forward skew risks correctly. As a reference, we use the Bergomi model, which treats these risks accurately. The results of our experiments show that the cost of poor volatility modeling in the Heston model, the Barndorff-Nielsen-Shephard model and a variance-gamma model with stochastic arrival is too high when pricing and hedging cliquet options.

Originalsprog	Engelsk
Tidsskrift	Journal of Risk
Vol/bind	17
Udgave nummer	1
Sider (fra-til)	85–103
ISSN	1465-1211
Status	Udgivet - okt. 2014

Citationsformater

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AB - In this paper, we conduct pricing and hedging experiments in order to check whether simple stochastic volatility models are capable of capturing forward volatility and forward skew risks correctly. As a reference, we use the Bergomi model, which treats these risks accurately. The results of our experiments show that the cost of poor volatility modeling in the Heston model, the Barndorff-Nielsen-Shephard model and a variance-gamma model with stochastic arrival is too high when pricing and hedging cliquet options.

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Numerical experiments on hedging cliquet options

Abstract

Fingeraftryk

Citationsformater