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| Content Provider | IEEE Xplore Digital Library |
|---|---|
| Author | Qian Chen Chengzhe Bai |
| Copyright Year | 2009 |
| Abstract | In this paper, we compare the costs and efficiency arising from the delta-neutral dynamic hedging of options, using two possible values for the delta of the option. The first one is the traditional Black-Scholes delta, while the second one is the GARCH option pricing delta, namely the delta of the option in the generalized Black-Scholes model with a volatility calibrated from GARCH model. Both our theoretical analysis and empirical results of S&P 500 index options showed that single-factor version of the GARCH delta showed better performance than B-S delta (1973), especially when the volatility are very high. We believe the improvement is due largely to the ability of the GARCH model to describe the correlation of volatility with spot returns. This allows the GARCH model to capture strike-price biases in the Black-Scholes model that give rise to the skew in implied volatilities in the index options market. |
| Starting Page | 303 |
| Ending Page | 307 |
| File Size | 378554 |
| Page Count | 5 |
| File Format | |
| ISBN | 9781424433346 |
| DOI | 10.1109/ICCET.2009.226 |
| Language | English |
| Publisher | Institute of Electrical and Electronics Engineers, Inc. (IEEE) |
| Publisher Date | 2009-01-22 |
| Publisher Place | Singapore |
| Access Restriction | Subscribed |
| Rights Holder | Institute of Electrical and Electronics Engineers, Inc. (IEEE) |
| Subject Keyword | Costs Garch Security Statistics Hedging Cost Pricing Delta hedging Cities and towns Time Series Performance analysis Risk management Portfolios Contracts |
| Content Type | Text |
| Resource Type | Article |
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