An Empirical Comparison of Option‐Pricing Models in Hedging Exotic Options |
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| Authors: | Yunbi An Wulin Suo |
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| Institution: | 1. Yunbi An is an Assistant Professor at the Odette School of Business, University of Windsor, Windsor, Ontario, Canada.;2. Wulin Suo is an Associate Professor at the School of Business, Queen's University, Kingston, Ontario, Canada. |
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| Abstract: | 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. |
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