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Hedging under alternative stickiness assumptions: an empirical analysis for barrier options

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  • Bernd Engelmann
  • Matthias R. Fengler
  • Peter Schwendner

Abstract

ABSTRACT In this study, we empirically analyze dynamic hedges of barrier options in the local volatility model using more than five years of data on the DAX, a major German equity index. The emphasis is on the comparison of the hedge performance of different hedging strategies under alternative stickiness assumptions on the dynamics of the implied volatility surface. We compare sticky-strike, sticky-moneyness and local volatility-implied (model-consistent) hedges for barrier options with a maturity of one and two years. We find that sticky-strike performs best, with the choice of the hedging strategy being a much more important factor for successful risk management than the stickiness assumption.

Suggested Citation

  • Bernd Engelmann & Matthias R. Fengler & Peter Schwendner, . "Hedging under alternative stickiness assumptions: an empirical analysis for barrier options," Journal of Risk, Journal of Risk.
    • Handle: RePEc:rsk:journ4:2160998
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