Hedging with Small Uncertainty Aversion
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Date
2016-01-04
Publication Type
Working Paper
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yes
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Abstract
We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their "distance" to a reference local volatility model. In the limit for small uncertainty aversion, this leads to explicit formulas for prices and hedging strategies in terms of the security’s cash gamma.
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published
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Volume
15 (19)
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Publisher
University of Geneva
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Subject
Volatility uncertainty; Smooth ambiguity aversion; Option pricing and hedging; Asymptotics
Organisational unit
03658 - Schweizer, Martin / Schweizer, Martin
03899 - Muhle-Karbe, Johannes (ehemalig)
Notes
Published online 3 July 2015. See also: http://e-citations.ethbib.ethz.ch/view/pub:189365.
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