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Repeated Richardson extrapolation and static hedging of barrier options under the CEV model
Author(s) -
Guo JiaHau,
Chang LungFu
Publication year - 2020
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.22100
Subject(s) - constant elasticity of variance model , richardson extrapolation , extrapolation , mathematical economics , matching (statistics) , econometrics , variance (accounting) , replication (statistics) , mathematics , elasticity (physics) , economics , statistics , physics , thermodynamics , volatility smile , accounting , volatility (finance) , sabr volatility model
Abstract This paper proposes an accelerated static replication approach for continuous European‐style barrier options by employing the repeated Richardson extrapolation technique with the Romberg sequence. This approach is developed under the constant elasticity of variance (CEV) model of Cox (1975) and Cox and Ross (1976) using the framework offered by Derman, Ergener, and Kani (1995; DEK) and its modified method of Chung et al. (2010, 2013a, 2013b) and Tsai (2014). The numerical results indicate that our method could significantly reduce replication errors for European knock‐out call options and may be superior to the imposition of the theta‐matching condition on the DEK method.