Resource title

Can Tests Based on Option Hedging Errors Correctly Identify Volatility Risk Premia?

Resource image

image for OpenScout resource :: Can Tests Based on Option Hedging Errors Correctly Identify Volatility Risk Premia?

Resource description

Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging error for a large class of stochastic volatility option pricing models. We show, however, that the problems of discrete trading and model mis-specification, which are necessarily present in any empirical study, may cause the standard test to yield unreliable results.

Resource author

Nicole Branger, Christian Schlag

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/23401

Resource license

Adapt according to the presented license agreement and reference the original author.