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Hedging Barrier Options in GARCH Models with Transaction Costs
Author(s) -
Huang ShihFeng,
Tsai ChanYi
Publication year - 2015
Publication title -
australian and new zealand journal of statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.434
H-Index - 41
eISSN - 1467-842X
pISSN - 1369-1473
DOI - 10.1111/anzs.12120
Subject(s) - autoregressive conditional heteroskedasticity , econometrics , transaction cost , autoregressive model , heteroscedasticity , database transaction , transaction data , computer science , mathematics , mathematical optimization , economics , volatility (finance) , finance , programming language
This study proposes a modified strike‐spread method for hedging barrier options in generalized autoregressive conditional heteroskedasticity (GARCH) models with transaction costs. A simulation study was conducted to investigate the hedging performance of the proposed method in comparison with several well‐known static methods for hedging barrier options. An accurate, easy‐to‐implement and fast scheme for generating the first passage time under the GARCH framework which enhances the accuracy and efficiency of the simulation is also proposed. Simulation results and an empirical study using real data indicate that the proposed approach has a promising performance for hedging barrier options in GARCH models when transaction costs are taken into consideration.