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Does model fit matter for hedging? Evidence from FTSE 100 options
Author(s) -
Alexander Carol,
Kaeck Andreas
Publication year - 2012
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20537
Subject(s) - economics , econometrics , moneyness , implied volatility , stochastic volatility , valuation of options , benchmark (surveying) , index (typography) , calibration , volatility (finance) , black–scholes model , volatility smile , exotic option , variance (accounting) , financial economics , mathematics , computer science , statistics , accounting , geodesy , world wide web , geography
This study implements a variety of different calibration methods applied to the Heston model and examines their effect on the performance of standard and minimum‐variance hedging of vanilla options on the FTSE 100 index. Simple adjustments to the Black–Scholes–Merton model are used as a benchmark. Our empirical findings apply to delta, delta‐gamma, or delta‐vega hedging and they are robust to varying the option maturities and moneyness, and to different market regimes. On the methodological side, an efficient technique for simultaneous calibration to option price and implied volatility index data is introduced. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:609–638, 2012