We thank an anonymous referee for excellent comments on an earlier draft of this study.
Does model fit matter for hedging? Evidence from FTSE 100 options
Article first published online: 22 JUN 2011
© 2011 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 32, Issue 7, pages 609–638, July 2012
How to Cite
Alexander, C. and Kaeck, A. (2012), Does model fit matter for hedging? Evidence from FTSE 100 options. J. Fut. Mark., 32: 609–638. doi: 10.1002/fut.20537
- Issue published online: 23 APR 2012
- Article first published online: 22 JUN 2011
- Manuscript Accepted: MAY 2011
- Manuscript Received: DEC 2010
This study implements a variety of different calibration methods applied to the Heston model and examines their effect on the performance of standard and minimum-variance hedging of vanilla options on the FTSE 100 index. Simple adjustments to the Black–Scholes–Merton model are used as a benchmark. Our empirical findings apply to delta, delta-gamma, or delta-vega hedging and they are robust to varying the option maturities and moneyness, and to different market regimes. On the methodological side, an efficient technique for simultaneous calibration to option price and implied volatility index data is introduced. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:609–638, 2012