Option Dynamic Hedging Strategy Based On Stochastic Volatility Model

The option pricing theory and risk hedging theory has made an indelible contribution in the process of rapid development in today’s derivatives market.In this paper,the two theories are combined to carry out a systematic study and empirical analysis.In the famous Black-Scholes option pricing model and stochastic volatility option pricing model,the reasonable volatility estimation has a very important influence on the result of option price calculation.This paper selects the Hong Kong Hang Seng index market data since 2010 and uses B-S option pricing formula,stochastic volatility model and five different volatility estimation methods,including implied volatility,historical volatility,exponentially weighted moving average volatility,GARCH model volatility and GARCH-M volatility to calculate the price of the Hong Kong Hang Seng Index Options.This paper c applies the calculated option prices to different dynamic hedging strategies(include fixed time interval Delta hedging strategy,fixed Delta change interval hedging strategy,fixed target asset price change interval hedging strategy)when evaluate the performance of various volatility estimation methods and option pricing models,the option pricing models were evaluated and analyzed according to the hedging result.The empirical results show that the B-S model with exponentially weighted moving average volatility has the best hedging result,followed by B-S model with historical volatility and stochastic volatility option pricing model with volatility of GARCH model,while the hedging effectiveness of the B-S model with implied volatility and stochastic volatility option pricing model with GARCH-M model volatility is weak.