Hedging surprises, jumps, and model misspecification: a risk management perspective on hedging S&P 500 options

Kaeck, Andreas (2013) Hedging surprises, jumps, and model misspecification: a risk management perspective on hedging S&P 500 options. Review of Finance, 17 (4). pp. 1535-1569. ISSN 1572-3097

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Abstract

This article provides comprehensive tests of alternative jump-diffusion models for the purpose of hedging S&P 500 options. We explicitly take into account the risk arising from price and variance jumps and assess the hedging performance by focusing on the ability of competing specifications to forecast hedging errors. To this end, we devise density prediction tests and find evidence that jumps are important features of S&P 500 index dynamics. All jump-diffusion models tested in this article show signs of misspecification, but the inclusion of jumps can improve the hedging performance and risk assessment, especially in two-instrument hedges.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
Depositing User: Catrina Hey
Date Deposited: 09 Sep 2013 15:56
Last Modified: 09 Sep 2013 15:56
URI: http://sro.sussex.ac.uk/id/eprint/45541
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