Using the short-lived arbitrage model to compute minimum variance hedge ratios: application to indices, stocks and commodities
The short-lived arbitrage model has been shown to significantly improve in-sample option pricing fit relative to the Black-Scholes model. Motivated by this model, we imply both volatility and virtual interest rates to adjust minimum variance hedge ratios. Using several error metrics, we find that th...
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| Veröffentlicht in: | Quantitative finance 2021, Vol.21 (1), p.125-142 |
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| container_title | Quantitative finance |
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| creator | Hilliard, Jimmy E. Hilliard, Jitka Ni, Yinan |
| description | The short-lived arbitrage model has been shown to significantly improve in-sample option pricing fit relative to the Black-Scholes model. Motivated by this model, we imply both volatility and virtual interest rates to adjust minimum variance hedge ratios. Using several error metrics, we find that the hedging model significantly outperforms the traditional delta hedge and a current benchmark hedge based on the practitioner Black-Scholes model. Our applications include hedges of index options, individual stock options and commodity futures options. Hedges on gold and silver are especially sensitive to virtual interest rates. |
| doi_str_mv | 10.1080/14697688.2020.1773519 |
| format | Article |
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| fulltext | fulltext |
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| ispartof | Quantitative finance, 2021, Vol.21 (1), p.125-142 |
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| language | eng |
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| source | Business Source Complete; Taylor & Francis:Master (3349 titles) |
| subjects | Arbitrage Hedge ratios Implied parameters Interest rates Practitioner Black-Scholes Short-lived arbitrage |
| title | Using the short-lived arbitrage model to compute minimum variance hedge ratios: application to indices, stocks and commodities |
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