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Hedging with small uncertainty aversion

Listed author(s):
  • Sebastian Herrmann

    ()

    (University of Michigan)

  • Johannes Muhle-Karbe

    ()

    (University of Michigan)

  • Frank Thomas Seifried

    ()

    (Universität Trier)

Registered author(s):

    Abstract We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their “distance” to a reference local volatility model. In the limit for small uncertainty aversion, this leads to explicit formulas for prices and hedging strategies in terms of the security’s cash gamma.

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    File URL: http://link.springer.com/10.1007/s00780-016-0309-z
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    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 21 (2017)
    Issue (Month): 1 (January)
    Pages: 1-64

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    Handle: RePEc:spr:finsto:v:21:y:2017:i:1:d:10.1007_s00780-016-0309-z
    DOI: 10.1007/s00780-016-0309-z
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/mathematics/quantitative+finance/journal/780/PS2

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