Hedging error in Lévy models with a Fast Fourier Transform approach
We measure, in terms of expectation and variance, the cost of hedging a contingent claim when the hedging portfolio is re-balanced at a discrete set of dates. The basic point of the methodology is to have an integral representation of the payoff of the claim, in other words to be able to write the payoff as an inverse Laplace transform. The models under consideration belong to the class of Lévy models, like NIG, VG and Merton models. The methodology is implemented through the popular FFT algorithm, used by many financial institutions for pricing and calibration purposes. As applications, we analyze the effect of increasing the number of tradings and we make some robustness tests.
|Date of creation:||01 Feb 2008|
|Contact details of provider:|| Postal: via Pascoli, 20 - 06123 Perugia|
Phone: +39 075 5855279
Fax: +39 075 5855299
Web page: http://www.econ.unipg.it/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:pia:wpaper:43/2008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Davide Castellani)
If references are entirely missing, you can add them using this form.