Quadratic hedging in affine stochastic volatility models |
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Authors: | Jan Kallsen Richard Vierthauer |
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Affiliation: | 1. Mathematisches Seminar, Christian-Albrechts-Universit?t zu Kiel, Christian-Albrechts-Platz 4, 24098, Kiel, Germany
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Abstract: | 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). |
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Keywords: | Mean-variance hedging Affine processes Stochastic volatility Laplace transform |
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