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Evaluating Discrete Dynamic Strategies in Affine Models

Listed author(s):
  • Flavio Angelini
  • Stefano Herzel

We consider the problem of measuring the performance of a dynamic strategy, rebalanced at a discrete set of dates, whose objective is that of replicating a claim in an incomplete market driven by a general multi-dimensional affine process. The main purpose of the paper is to propose a method to efficiently compute the expected value and variance of the hedging error of the strategy. Representing the pay-off the claim as an inverse Laplace transform, we are able to get semi-explicit formulas for strategies satisfying a certain property. The result is quite general and can be applied to a very rich class of models and strategies, including Delta hedging. We provide illustrations for the cases of interest rate models and Heston's stochastic volatility model.

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Paper provided by Università di Perugia, Dipartimento Economia in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 71/2009.

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Length: 25 pages
Date of creation: 01 Nov 2009
Handle: RePEc:pia:wpaper:71/2009
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