An Empirical Comparison of Two Stochastic Volatility Models using Indian Market Data
AbstractWe conduct an empirical comparison of hedging strategies for two different stochastic volatility models proposed in the literature. One is an asymptotic expansion approach and the other is the risk-minimizing approach applied to a Markov-switched geometric Brownian motion. We also compare these with the Black–Scholes delta hedging strategies using historical and implied volatilities. The derivatives we consider are European call options on the NIFTY index of the Indian National Stock Exchange. We compare a few cases with profit and loss data from a trading desk. We find that for the cases that we analyzed, by far the better results are obtained for the Markov-switched geometric Brownian motion. Copyright Springer Science+Business Media New York 2013
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Bibliographic InfoArticle provided by Springer in its journal Asia-Pacific Financial Markets.
Volume (Year): 20 (2013)
Issue (Month): 3 (September)
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Web page: http://springerlink.metapress.com/link.asp?id=102851
Option pricing; Stochastic volatility; Mean reverting; Regime switching; Risk minimizing; C02; C90; G13;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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