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Static hedges for reverse barrier options with robustness against skew risk: an empirical analysis

Author

Listed:
  • Jan Maruhn
  • Morten Nalholm
  • Matthias Fengler

Abstract

We conduct an empirical evaluation of a static super-replicating hedge of barrier options. The hedge is robust to uncertainty about the future skew. Using almost seven years of current data on the DAX, we evaluate the performance of the hedge and compare it with those of both a dynamic and a static replicating hedge. The main result is that the robustness of the static super-replicating portfolio is also empirically confirmed in practice such that the hedge sets an upper bound for the price of skew risk for barrier options.

Suggested Citation

  • Jan Maruhn & Morten Nalholm & Matthias Fengler, 2011. "Static hedges for reverse barrier options with robustness against skew risk: an empirical analysis," Quantitative Finance, Taylor & Francis Journals, vol. 11(5), pages 711-727.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:5:p:711-727
    DOI: 10.1080/14697680903154241
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    References listed on IDEAS

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