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Model risk adjusted hedge ratios

journal contribution
posted on 2023-06-08, 12:22 authored by Carol AlexanderCarol Alexander, Andreas KaeckAndreas Kaeck, Leonardo M Nogueira
Most option pricing models assume all parameters except volatility are fixed; yet they almost invariably change on re-calibration. This article explains how to capture the model risk that arises when parameters that are assumed constant have calibrated values that change over time and how to use this model risk to adjust the price hedge ratios of the model. Empirical results demonstrate an improvement in hedging performance after the model risk adjustment.

History

Publication status

  • Published

Journal

Journal of Futures Markets

ISSN

0270-7314

Publisher

Wiley-Blackwell

Issue

11

Volume

29

Page range

1021-1049

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-09-11

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