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On the Performance of Delta Hedging Strategies in Exponential L\'evy Models

  • Stephan Denkl
  • Martina Goy
  • Jan Kallsen
  • Johannes Muhle-Karbe
  • Arnd Pauwels
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    We consider the performance of non-optimal hedging strategies in exponential L\'evy models. Given that both the payoff of the contingent claim and the hedging strategy admit suitable integral representations, we use the Laplace transform approach of Hubalek et al. (2006) to derive semi-explicit formulas for the resulting mean squared hedging error in terms of the cumulant generating function of the underlying L\'evy process. In two numerical examples, we apply these results to compare the efficiency of the Black-Scholes hedge and the model delta to the mean-variance optimal hedge in a normal inverse Gaussian and a diffusion-extended CGMY L\'evy model.

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    File URL: http://arxiv.org/pdf/0911.4859
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    Paper provided by arXiv.org in its series Papers with number 0911.4859.

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    Date of creation: Nov 2009
    Date of revision: May 2011
    Handle: RePEc:arx:papers:0911.4859
    Contact details of provider: Web page: http://arxiv.org/

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