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An Empirical Comparison of Option-Pricing Models in Hedging Exotic Options

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  • Yunbi An
  • Wulin Suo

Abstract

"This paper examines the empirical performance of various option-pricing models in hedging exotic options, such as barrier options and compound options. A practical and relevant testing approach is adopted to capture the essence of model risk in option pricing and hedging. Our results indicate that the exotic feature of the option under consideration has a great impact on the relative performance of different option-pricing models. In addition, for any given model, the more "exotic" the option, the poorer the hedging effectiveness." Copyright (c) 2009 Financial Management Association International.

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  • Yunbi An & Wulin Suo, 2009. "An Empirical Comparison of Option-Pricing Models in Hedging Exotic Options," Financial Management, Financial Management Association International, vol. 38(4), pages 889-914, December.
  • Handle: RePEc:bla:finmgt:v:38:y:2009:i:4:p:889-914
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    Cited by:

    1. Harish S. Bhat & Nitesh Kumar, 2015. "Large-Scale Empirical Tests of the Markov Tree Model," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 3(3), pages 1-39, July.
    2. Bedendo, Mascia & Campolongo, Francesca & Joossens, Elisabeth & Saita, Francesco, 2010. "Pricing multiasset equity options: How relevant is the dependence function?," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 788-801, April.

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