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Model risk adjusted hedge ratios
journal contribution
posted on 2023-06-08, 12:22 authored by Carol AlexanderCarol Alexander, Andreas KaeckAndreas Kaeck, Leonardo M NogueiraMost option pricing models assume all parameters except volatility are fixed; yet they almost invariably change on re-calibration. This article explains how to capture the model risk that arises when parameters that are assumed constant have calibrated values that change over time and how to use this model risk to adjust the price hedge ratios of the model. Empirical results demonstrate an improvement in hedging performance after the model risk adjustment.
History
Publication status
- Published
Journal
Journal of Futures MarketsISSN
0270-7314Publisher
Wiley-BlackwellExternal DOI
Issue
11Volume
29Page range
1021-1049Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2012-09-11Usage metrics
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