Static Hedges of Barrier Options Under Fast Mean-Reverting Stochastic Volatility

被引:0
作者
Huh, Jeonggyu [1 ]
Jeon, Jaegi [1 ]
Ma, Yong-Ki [2 ]
机构
[1] Yonsei Univ, Dept Math, Seoul 03722, South Korea
[2] Kongju Natl Univ, Dept Appl Math, Gongju Si 32588, Chungcheongnam, South Korea
基金
新加坡国家研究基金会;
关键词
Stochastic volatility model; Static hedge; Transaction costs; Barrier option; Perturbation theory; VARIANCE; MODELS;
D O I
10.1007/s10614-019-09883-1
中图分类号
F [经济];
学科分类号
02 ;
摘要
In this paper, we suggest a numerically stable method for static hedging of barrier options under fast mean-reverting stochastic volatility with transaction costs. We elucidate how perturbation theory converts static hedging on time-volatility grid into the problem of designing two simpler static hedges on time grid, and see why this precludes any ill-conditioned problem from springing up. Our static hedging approach is an effective means to statically replicate the barrier option, and can therefore solve the problem of transaction costs by obtaining stable weights of the portfolio. Simulation results show that our method could obtain better hedging performance compared to preceding static hedge methods.
引用
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页码:185 / 210
页数:26
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