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The Systematic Risk of Discretely Rebalanced Option Hedges

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Author Info
Gilster, John E.
Abstract

This paper demonstrates that Black-Scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals. This systematic risk may have biased important empirical tests of the option pricing model. Moreover, this systematic risk means that the Black-Scholes option pricing model is inherently inconsistent with the discrete time version of the Capital Asset Pricing Model (CAPM).

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File URL: http://journals.cambridge.org/abstract_S0022109000007353
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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 25 (1990)
Issue (Month): 04 (December)
Pages: 507-516
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:25:y:1990:i:04:p:507-516_00

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  1. Robert F. Engle & Joshua V. Rosenberg, 1995. "GARCH Gamma," NBER Working Papers 5128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Bas Peeters & Cees L. Dert & André Lucas, 2003. "Black Scholes for Portfolios of Options in Discrete Time: the Price is Right, the Hedge is wrong," Tinbergen Institute Discussion Papers 03-090/2, Tinbergen Institute. [Downloadable!]
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