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Exploring option pricing and hedging via volatility asymmetry

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  • Casas, Isabel
  • Lopes Moreira Da Veiga, María Helena

Abstract

This paper evaluates the application of two well-known asymmetric stochastic volatility (ASV) models to option price forecasting and dynamic delta hedging. They are specied in discrete time in contrast to the classical stochastic volatility (SV) models used in option pricing. There is some related literature, but little is known about the empirical implications of volatility asymmetry on option pricing. The objectives of this paper are to estimate ASV option pricing models using a Bayesian approach unknown in this type of literature, and to investigate the e ect of volatility asymmetry on option pricing for di erent size equity sectors and periods of volatility. Using the S&P MidCap 400 and S&P 500 European call option quotes, results show that volatility asymmetry benets the accuracy of option price forecasting and hedging cost e ectiveness in the large-cap equity sector. However, asymmetric SV models do not improve the option price forecasting and dynamic hedging in the mid-cap equity sector.

Suggested Citation

  • Casas, Isabel & Lopes Moreira Da Veiga, María Helena, 2019. "Exploring option pricing and hedging via volatility asymmetry," DES - Working Papers. Statistics and Econometrics. WS 28234, Universidad Carlos III de Madrid. Departamento de Estadística.
  • Handle: RePEc:cte:wsrepe:28234
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    References listed on IDEAS

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    More about this item

    Keywords

    Delta Hedging;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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