A Note on Hedging in ARCH and Stochastic Volatility Option Pricing Models
AbstractRecently, Duan (1995) proposed a GARCH option pricing formula and a corresponding hedging formula. In a similar ARCH-type model for the underlying asset, Kallsen and Taqqu (1994) arrived at a hedging formula different from Duan's although they concur on the pricing formula. In this note, we explain this difference by pointing out that the formula developed by Kallsen and Taqqu corresponds to the usual concept of hedging in the context of ARCH-type models. We argue, however, that Duan's formula has some appeal and we propose a stochastic volatility model that ensures its validity. We conclude by a comparison of ARCH-type and stochastic volatility option pricing models. Copyright Blackwell Publishers 1998.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Mathematical Finance.
Volume (Year): 8 (1998)
Issue (Month): 2 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627
Other versions of this item:
- René Garcia & Éric Renault, 1997. "A Note on Hedging in ARCH and Stochastic Volatility Option Pricing Models," CIRANO Working Papers 97s-13, CIRANO.
- G1 - Financial Economics - - General Financial Markets
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