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Local risk-minimization for Barndorff-Nielsen and Shephard models

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  • Takuji Arai
  • Yuto Imai
  • Ryoichi Suzuki

Abstract

We obtain explicit representations of locally risk-minimizing strategies of call and put options for the Barndorff-Nielsen and Shephard models, which are Ornstein--Uhlenbeck-type stochastic volatility models. Using Malliavin calculus for Levy processes, Arai and Suzuki (2015) obtained a formula for locally risk-minimizing strategies for Levy markets under many additional conditions. Supposing mild conditions, we make sure that the Barndorff-Nielsen and Shephard models satisfy all the conditions imposed in Arai and Suzuki (2015). Among others, we investigate the Malliavin differentiability of the density of the minimal martingale measure. Moreover, some numerical experiments for locally risk-minimizing strategies are introduced.

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  • Takuji Arai & Yuto Imai & Ryoichi Suzuki, 2015. "Local risk-minimization for Barndorff-Nielsen and Shephard models," Papers 1503.08589, arXiv.org, revised Jan 2016.
    • Handle: RePEc:arx:papers:1503.08589
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    References listed on IDEAS

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    1. Jouini,E. & Cvitanic,J. & Musiela,Marek (ed.), 2001. "Handbooks in Mathematical Finance," Cambridge Books, Cambridge University Press, number 9780521792370, October.
    2. Delong, Lukasz & Imkeller, Peter, 2010. "On Malliavin's differentiability of BSDEs with time delayed generators driven by Brownian motions and Poisson random measures," Stochastic Processes and their Applications, Elsevier, vol. 120(9), pages 1748-1775, August.
    3. Jan Kallsen & Richard Vierthauer, 2009. "Quadratic hedging in affine stochastic volatility models," Review of Derivatives Research, Springer, vol. 12(1), pages 3-27, April.
    4. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
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    Cited by:

    1. Takuji Arai & Yuto Imai & Ryoichi Suzuki, 2017. "Local risk-minimization for Barndorff-Nielsen and Shephard models," Finance and Stochastics, Springer, vol. 21(2), pages 551-592, April.

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