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Discrete time hedging errors for options with irregular payoffs

Listed author(s):
  • Emmanuel Temam


    (Université Paris VI - CERMICS, Ecole Nationale des Ponts et Chaussées, 6 et 8 avenue Blaise Pascal, 77455 Marne La Vallée, France Manuscript)

  • Emmanuel Gobet


    (CMAP-Ecole Polytechnique, 91128 Palaiseau Cedex, France)

Registered author(s):

    In a complete market with a constant interest rate and a risky asset, which is a linear diffusion process, we are interested in the discrete time hedging of a European vanilla option with payoff function f. As regards the perfect continuous hedging, this discrete time strategy induces, for the trader, a risk which we analyze w.r.t. n, the number of discrete times of rebalancing. We prove that the rate of convergence of this risk (when $n \rightarrow + \infty$) strongly depends on the regularity properties of f: the results cover the cases of standard options.

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    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 5 (2001)
    Issue (Month): 3 ()
    Pages: 357-367

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    Handle: RePEc:spr:finsto:v:5:y:2001:i:3:p:357-367
    Note: received: July 1999; final version received: September 2000
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