European Business Schools Librarian's Group

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 165: Discrete Time Hedging of OTC Options in a GARCH Environment: A Simulation Experiment

Gustaf E. Hagerud
Additional contact information
Gustaf E. Hagerud: Department of Finance, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: 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. It is shown that the variance of the returns on the hedged position is considerably higher in a GARCH (1,1) environment than in a homoskedastic environment. The variance of returns depends greatly on the level of kurtosis in the returns process and on the first-order autocorrelation in centered and squared returns.

Keywords: GARCH; option pricing; Black and Scholes formula; Monte Carlo experiment

JEL-codes: C15; C22

22 pages, March 1997

Full text files 

hastef0165.ps PostScript file 
hastef0165.ps.zip PostScript file 
hastef0165.pdf PDF-file 
hastef0165.pdf.zip PDF-file

Download statistics

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hastef:0165This page generated on 2024-09-13 22:19:41.