Hedging Options in a GARCH Environment: Testing the Term Structure of Stochastic Volatility Models / Robert F. Engle, Joshua Rosenberg.

Format:

Book

Author/Creator:

Engle, Robert F.

Contributor:

National Bureau of Economic Research.

Rosenberg, Joshua.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4958.

NBER working paper series no. w4958

Language:

English

Subjects (All):

Stochastic processes.

Heteroscedasticity.

Hedging (Finance).

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Hedging Options in a GARCH Environment

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Cambridge, Massachusetts : National Bureau of Economic Research, 1994.

Summary:

This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P 500 index volatility. Volatility models are compared by their ability to hedge options positions sensitive to the term structure of volatility. Overall, the most effective hedge is a Black-Scholes (BS) delta-gamma hedge, while the BS delta-vega hedge is the least effective. The most successful volatility hedge is GARCH components delta-gamma, suggesting that the GARCH components estimate of the term structure of volatility is most accurate. The success of the BS delta-gamma hedge may be due to mispricing in the options market over the sample period.

Notes:

Print version record

December 1994.