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Evaluating Discrete Dynamic Strategies in Affine Models

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  • Flavio Angelini
  • Stefano Herzel

Abstract

We consider the problem of measuring the performance of a dynamic strategy, rebalanced at a discrete set of dates, whose objective is that of replicating a claim in an incomplete market driven by a general multi-dimensional affine process. The main purpose of the paper is to propose a method to efficiently compute the expected value and variance of the hedging error of the strategy. Representing the pay-off the claim as an inverse Laplace transform, we are able to get semi-explicit formulas for strategies satisfying a certain property. The result is quite general and can be applied to a very rich class of models and strategies, including Delta hedging. We provide illustrations for the cases of interest rate models and Heston's stochastic volatility model.

Suggested Citation

  • Flavio Angelini & Stefano Herzel, 2009. "Evaluating Discrete Dynamic Strategies in Affine Models," Quaderni del Dipartimento di Economia, Finanza e Statistica 71/2009, Università di Perugia, Dipartimento Economia.
    • Handle: RePEc:pia:wpaper:71/2009
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    Cited by:

    1. Damiani, Mirella & Pompei, Fabrizio & Ricci, Andrea, 2011. "Temporary job protection and productivity growth in EU economies," MPRA Paper 29698, University Library of Munich, Germany.
    2. Flavio Angelini & Marco Nicolosi, 2010. "On the Effect of Skewness and Kurtosis Misspecification on the Hedging Error," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 39(3), pages 203-226, November.
    3. Mirella Damiani, 2010. "Labour regulation, corporate governance and varieties of capitalism," Quaderni del Dipartimento di Economia, Finanza e Statistica 76/2010, Università di Perugia, Dipartimento Economia.
    4. Stefano Herzel & Marco Nicolosi & Cătălin Stărică, 2012. "The cost of sustainability in optimal portfolio decisions," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 333-349, May.
    5. Marco Nicolosi & Flavio Angelini & Stefano Herzel, 2018. "Portfolio management with benchmark related incentives under mean reverting processes," Annals of Operations Research, Springer, vol. 266(1), pages 373-394, July.
    6. Silvia Micheli, 2010. "Learning Curve and Wind Power," Quaderni del Dipartimento di Economia, Finanza e Statistica 81/2010, Università di Perugia, Dipartimento Economia.
    7. Flavio ANGELINI & Stefano HERZEL, 2012. "Delta Hedging in Discrete Time under Stochastic Interest Rate," Quaderni del Dipartimento di Economia, Finanza e Statistica 110/2012, Università di Perugia, Dipartimento Economia.
    8. Francesco Venturini, 2011. "Product variety, product quality, and evidence of Schumpeterian endogenous growth: a note," Quaderni del Dipartimento di Economia, Finanza e Statistica 93/2011, Università di Perugia, Dipartimento Economia.
    9. Davide Castellani & Fabio Pieri, 2011. "Foreign Investments and Productivity Evidence from European Regions," Quaderni del Dipartimento di Economia, Finanza e Statistica 83/2011, Università di Perugia, Dipartimento Economia.

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