Article ID Journal Published Year Pages File Type
5083382 International Review of Economics & Finance 2015 14 Pages PDF
Abstract

We investigate daily robust hedging performance with trading costs for markets of Standard and Poor's (S&P) 500 Index options (SPX) and Taiwan index options (TXO). In addition, we conduct a theoretical analysis to cope with the price limit constraint in TXO. Robust hedging refers to minimal model dependence on a risky asset price. Two hedging categories, including “Model-Free” and “Volatility-Model-Free,” are investigated, and nonparametric methods for volatility estimation are considered in our empirical study. In particular, instantaneous volatility is estimated by a proposed nonlinear correction scheme of the Fourier transform method (Malliavin & Mancino, 2009), justified by a simulation study for a local volatility model. We found an asymmetric phenomenon in hedging performance. Hedging portfolios constructed from the “Volatility-Model-Free” category were found to induce much higher Sharpe ratios than those from the “Model-Free” category on SPX, while they were found to perform comparably on TXO. Motivated from the price limit regulation in Taiwan, we further develop a time-scale change method to explain this phenomenon. Asymptotic moment estimates of differences in some hedging portfolios are consistent with our empirical findings.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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