City Research Online

Mean-variance hedging and optimal investment in Heston's model with correlation

Černý, A. & Kallsen, J. (2008). Mean-variance hedging and optimal investment in Heston's model with correlation. Mathematical Finance, 18(3), pp. 473-492. doi: 10.1111/j.1467-9965.2008.00342.x

Abstract

This paper solves the mean{variance hedging problem in Heston's model with a stochastic opportunity set moving systematically with the volatility of stock returns. We allow for correlation between stock returns and their volatility (so-called leverage effect).

Our contribution is threefold: using a new concept of opportunity-neutral measure we present a simplified strategy for computing a candidate solution in the correlated case. We then go on to show that this candidate generates the true variance-optimal martingale measure; this step seems to be partially missing in the literature. Finally, we derive formulas for the hedging strategy and the hedging error.

Publication Type: Article
Publisher Keywords: Social Sciences, Science & Technology, Physical Sciences, Business, Finance, Economics, Mathematics, Interdisciplinary Applications, Social Sciences, Mathematical Methods, Business & Economics, Mathematics, Mathematical Methods In Social Sciences, BUSINESS, FINANCE, ECONOMICS, MATHEMATICS, INTERDISCIPLINARY APPLICATIONS, SOCIAL SCIENCES, MATHEMATICAL METHODS, mean-variance hedging, stochastic volatility, Heston's model, affine process, option pricing, optimal investment, STOCHASTIC VOLATILITY, AFFINE PROCESSES, FINANCE
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
SWORD Depositor:
[thumbnail of HestonFinalMiktex.pdf]
Preview
PDF
Download (304kB) | Preview

Export

Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login