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Comparison of Some Key Approaches to Hedging in Incomplete Markets

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Abstract

The paper provides a numerical comparison of local risk minimisation and mean-variance hedging for some key variations of stochastic volatility models. A hedging and pricing framework is established for both approaches. Important quantitative differences become apparent that have implications for the implementation of hedging strategies under stochastic volatility.

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  • David Heath & Eckhard Platen & M. Schweizer, 1998. "Comparison of Some Key Approaches to Hedging in Incomplete Markets," Research Paper Series 1, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:1
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    Cited by:

    1. Matthias Otto, 1999. "Stochastic relaxational dynamics applied to finance: towards non-equilibrium option pricing theory," Papers cond-mat/9906196, arXiv.org, revised Oct 1999.
    2. Otto, Matthias, 2001. "Finite arbitrage times and the volatility smile?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 299-304.

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