Augustyniak, Maciej, Godin, Frédéric and Simard, Clarence (2019) A profitable modification to global quadratic hedging. Journal of Economic Dynamics and Control . ISSN 01651889 (In Press)
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Official URL: http://dx.doi.org/10.1016/j.jedc.2019.05.008
Abstract
Recent research has shown that global quadratic hedging, also known as variance-optimal hedging and mean-variance hedging, can significantly reduce the risk of hedging call and put options with long-term maturities (one year or more), such as Long-Term Equity AnticiPation Securities (LEAPS). We propose a modification to global quadratic hedging that is more profitable on average to the hedger without substantially increasing his downside hedging risk, if at all. We prove mathematically that the expected terminal hedging gain of our modified strategy is greater than that of the global quadratic hedging strategy. The performance of our strategy is evaluated under simulated return paths from GARCH, regime-switching and jump-diffusion models, and under empirical S&P 500 return paths.
| Divisions: | Concordia University > Faculty of Arts and Science > Mathematics and Statistics |
|---|---|
| Item Type: | Article |
| Refereed: | Yes |
| Authors: | Augustyniak, Maciej and Godin, Frédéric and Simard, Clarence |
| Journal or Publication: | Journal of Economic Dynamics and Control |
| Date: | 16 May 2019 |
| Digital Object Identifier (DOI): | 10.1016/j.jedc.2019.05.008 |
| Keywords: | Risk management; Variance-optimal hedging; Mean-variance hedging; Global risk-minimization; LEAPS |
| ID Code: | 985442 |
| Deposited By: | Monique Lane |
| Deposited On: | 03 Jun 2019 18:36 |
| Last Modified: | 16 May 2021 01:00 |
References:
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