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An Empirical Comparison of Option‐Pricing Models in Hedging Exotic Options
Author(s) -
An Yunbi,
Suo Wulin
Publication year - 2009
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2009.01060.x
Subject(s) - exotic option , valuation of options , asian option , monte carlo methods for option pricing , black–scholes model , economics , trinomial tree , empirical evidence , actuarial science , binomial options pricing model , financial economics , volatility (finance) , philosophy , epistemology
This paper examines the empirical performance of various option‐pricing models in hedging exotic options, such as barrier options and compound options. A practical and relevant testing approach is adopted to capture the essence of model risk in option pricing and hedging. Our results indicate that the exotic feature of the option under consideration has a great impact on the relative performance of different option‐pricing models. In addition, for any given model, the more “exotic” the option, the poorer the hedging effectiveness.