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On the computation of hedging strategies in affine GARCH models
Author(s) -
Augustyniak Maciej,
Badescu Alexandru
Publication year - 2021
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.22187
Subject(s) - affine transformation , autoregressive conditional heteroskedasticity , econometrics , computation , mathematics , benchmark (surveying) , variance (accounting) , kernel (algebra) , gaussian , valuation of options , limit (mathematics) , minification , mathematical optimization , economics , computer science , volatility (finance) , algorithm , mathematical analysis , physics , accounting , geodesy , combinatorics , quantum mechanics , pure mathematics , geography
This paper discusses the computation of hedging strategies under affine Gaussian GARCH dynamics. The risk‐minimization hedging strategy is derived in closed‐form and related to minimum variance delta hedging. Several numerical experiments are conducted to investigate the accuracy and properties of the proposed hedging formula, as well as the convergence to its continuous‐time counterpart based on the GARCH diffusion limit process. An empirical analysis with S&P 500 option data over 2001–2015 indicates that risk‐minimization hedging with the affine Gaussian GARCH model outperforms benchmark delta hedges. Our study also reveals that the variance‐dependent pricing kernel contributes to improving the hedging performance.