Static Hedges for Reverse Barrier Options with Robustness Against Skew Risk: An Empirical Analysis

Quantitative Finance, Vol. 11, No. 5, pp. 711-727, 2011

Posted: 3 Feb 2012

See all articles by Maruhn Jan

Maruhn Jan

University of Trier

Morten Nalholm

Copenhagen Business School - Department of Finance

Matthias R. Fengler

University of St. Gallen - School of Economics and Political Science; Swiss Finance Institute

Date Written: January 4, 2010

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.

Keywords: Barrier options, Static hedging, Skew risk

JEL Classification: C32, C15, G13, G14

Suggested Citation

Jan, Maruhn and Nalholm, Morten and Fengler, Matthias R., Static Hedges for Reverse Barrier Options with Robustness Against Skew Risk: An Empirical Analysis (January 4, 2010). Quantitative Finance, Vol. 11, No. 5, pp. 711-727, 2011, Available at SSRN: https://ssrn.com/abstract=1998102

Maruhn Jan

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

Morten Nalholm

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Matthias R. Fengler (Contact Author)

University of St. Gallen - School of Economics and Political Science ( email )

Bodanstrasse 6
CH-9000 St. Gallen, 9000
Switzerland

HOME PAGE: http://www.mathstat.unisg.ch/fengler

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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