Hedging options in a GARCH environment testing the term structure of stochastic volatility models by R. F. Engle

Cover of: Hedging options in a GARCH environment | R. F. Engle

Published by National Bureau of Economic Research in Cambridge, MA .

Written in English

Read online

Subjects:

  • Hedging (Finance) -- Econometric models.,
  • Stock options -- Econometric models.,
  • Stochastic processes.,
  • Heteroscedasticity.

Edition Notes

Book details

StatementRobert F. Engle, Joshua Rosenberg.
SeriesNBER working paper series -- working paper no. 4958, Working paper series (National Bureau of Economic Research) -- working paper no. 4958.
ContributionsRosenberg, Joshua., National Bureau of Economic Research.
The Physical Object
Pagination26, [9] p. :
Number of Pages26
ID Numbers
Open LibraryOL22420521M

Download Hedging options in a GARCH environment

Get this from a library. Hedging options in a GARCH environment: testing the term structure of stochastic volatility models. [R F Engle; Joshua Rosenberg; National Bureau of Economic Research.].

Hedging Options in a GARCH Environment: Testing the Hedging options in a GARCH environment book Structure of Stochastic Volatility Models Robert F.

Engle, Joshua Rosenberg. NBER Working Paper No. Issued in December NBER Program(s):Asset Pricing. Get this from a library. Hedging Options in a GARCH Environment: Testing the Term Structure of Stochastic Volatility Models. [R F Engle; Joshua Rosenberg] -- This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S & P index volatility.

Hedging options in a GARCH environment book The definitive book on options trading and risk management "If pricing is a science and hedging is an art, Taleb is a virtuoso." -Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets "This is not merely the best book on how options trade, it is the only book." -Stan Jonas, Managing Director, FIMAT-Society GARCH.

Downloadable. This paper examines the effect of using Black and Scholes formula for pricing and hedging options in a discrete time heteroskedastic environment. This is done by a simulation procedure where asset returns are generated from a GARCH (1,1)-t model. In the simulation a hypothetical trader writes an option and then delta- hedges his position until the option expires.

Hedging Barrier Options in GARCH Models with Transaction Costs Article in Australian & New Zealand Journal of Statistics 57(3):n/a-n/a June with 89 Reads How we measure 'reads'.

A GARCH Option Pricing Model in Incomplete Markets Abstract We propose a new method for pricing options based on GARCH models with flltered histor-ical innovations. In an incomplete market framework we allow for difierent distributions of the historical and the pricing return dynamics enhancing the model °exibility to flt market option prices.

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M-GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets By Wenling Yang Edith Cowan University School of Finance and Business Economics Working Paper Series March Working Paper ISSN: Correspondence author and address: Wenling Yang School of Finance and Business Economics Faculty of Business and Public Cited by: Dynamic Hedging: Managing Vanilla and Exotic Options (Wiley Finance Book 64) - Kindle edition by Taleb, Nassim Nicholas.

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In addition, we provide the first ever hedging effectiveness tests of GARCH option models. Keywords: GARCH option models, stochastic volatility models with jumps, pricing and hedging options Suggested citation: Duan, Jin-Chuan, Peter Ritchken, and Zhiqiang Sun, Cited by: Downloadable.

This paper addresses the issue of hedging option positions when the underlying asset exhibits stochastic volatility. By parameterizing the volatility process as GARCH, and utilizing risk- neutral valuation, we estimate hedging parameters (delta and gamma) using Monte-Carlo simulation.

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addressed the issue of hedging effectiveness under conditions of asymmetry by combining these models, together with hedging effectiveness methods that measure tail probabilities. This study addresses this, and differs from prior research in a number of ways.

The hedging effectiveness is measured in terms of ex-post and ex-ante risk-return trade-off at various forecasting horizons. It is generally found that the GARCH time varying hedge ratios provide the greatest portfolio risk reduction, particularly for longer hedging horizons, but they do not generate the highest portfolio by: The definitive book on options trading and risk management “If pricing is a science and hedging is an art, Taleb is a virtuoso.” –Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets “This is not merely the best book on how options trade, it is the only book.” –Stan Jonas, Managing Director, FIMAT–Society GARCH.

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Keywords: GARCH option models, stochastic volatility models with jumps, pricing and hedging options Suggested Citation: Suggested Citation Duan, Jin-Chuan and Ritchken, Peter H. and Sun, Zhiqiang, Jump Starting GARCH: Pricing and Hedging Options With Jumps in Returns and Volatilities (December ).Cited by: Jump Starting GARCH: Pricing and Hedging Options with Jumps in Returns and Volatilities.

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CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset returns and volatilities. Limiting cases of our GARCH processes consist of models where both asset returns and local volatility follow jump diffusion processes with correlated jump sizes.

Nassim Taleb - Dynamic Hedging. Managing Vanilla and Exotic Options Download, The path dependence of all options hedged dynamically. This note compares the hedging effectiveness of the conventional hedge ratio and time-varying conditional hedge ratios (of which GARCH ratio is a special case).

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Ameur, Breton and Martinez () developed a dynamic programming approach to pricing options under GARCH. Heston and Nandi () developed a quasi-analytical formula for Euopean options under a particular GARCH speci cation.

Duan, Gauthier and Simonato () and Duan, Gauthier. Bhadurai and Durai estimated optimal hedge ratio and analysed hedging effectiveness of stock index futures of National Stock Exchange for the period from 4th September to 4th August This study used four econometric models, OLS Regression, VAR, VECM and M-GARCH.

The effectiveness of the optimal hedge ratios derived from these models. Testing the volatility term structure using option hedging criteria March are only applicable to at-the-money options and may not be directly used to hedge an options book which has options with a variety of moneynesses.

Engle and Rosenberg () provide an alternative GARCH Hedging options in a stochastic volatility environment. The definitive book on options trading and risk management "If pricing is a science and hedging is an art, Taleb is a virtuoso." Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets "This is not merely the best book on how options trade, it is the only book." Stan Jonas, Managing Director, FIMAT-Société Générale/5(33).

This volume covers all aspects of pricing, hedging and trading of financial instruments. The book has many practical exmaples not provided in other books. Excellent for undergraduate and graduate classes. Matlab codes and excel spreadsheets with codes are included making this one of the best and most practical books on the subject.

Predictive Accuracy of GARCH, GJR and EGARCH Models Select Exchange Rates Application By Ravindran Ramasamy & Shanmugam Munisamy University Tun Abdul Razak. Abstract - Accurate forecasted data will reduce not only the hedging costs but also the information will be useful in several other decisions.

This paper compares three simulated. This paper examines hedging effectiveness for the FTSE Stock Index futures contract from to It investigates the appropriate econometric technique to use in estimating minimum variance hedge ratios by undertaking estimations using OLS, an ECM and GARCH.

Simple OLS outperforms more complex econometric techniques. Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly affects the values of fixed-income securities. -Bruno Dupire, Head of Swaps and Options Research, Paribas Capital Markets "This is not merely the best book on how options trade, it is the only book." -Stan Jonas, Managing Director, FIMAT-Society GARCH "Dynamic Hedging bridges the gap between what the best traders know and what the best scholars can prove.".

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