Perfect Hedging of Index Derivatives under a Locally Arbitrage Free Minimal Market Model
نویسندگان
چکیده
The paper presents a nancial market model that generates stochastic volatility using a minimal set of factors. These factors, formed from transformations of square root processes, model the dynamics of di erent denominations of a benchmark portfolio. Benchmarked prices are assumed to be local martingales. Numerical results for the pricing and hedging of basic derivatives on indices are described. This includes cases where the standard risk neutral pricing methodology fails. However, payo s can be perfectly hedged using selfnancing strategies and a form of arbitrage still exists. This is illustrated by hedge simulations. The term structure of implied volatilities is documented. 1991Mathematics Subject Classi cation: primary 90A12; secondary 60G30, 62P20. JEL Classi cation: G12
منابع مشابه
Perfect Hedging of Index Derivatives under a Minimal Market Model
The paper presents a nancial market model that generates stochastic volatility using a minimal set of factors These factors formed by transformations of square root processes model the dynamics of di erent denominations of a benchmark portfolio Benchmarked prices are assumed to be local martin gales Numerical results for the pricing and hedging of basic derivatives on indices are described for ...
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تاریخ انتشار 2001