Quadratic hedging in affine stochastic volatility models

We determine the variance-optimal hedge for a subset of affine processes including a number of popular stochastic volatility models. This framework does not require the asset to be a martingale. We obtain semiexplicit formulas for the optimal hedging strategy and the minimal hedging error by applying general structural results and Laplace transform techniques. The approach is illustrated numerically for a Lévy-driven stochastic volatility model with jumps as in Carr et al. (Math Finance 13:345–382, 2003).