Hedging with small uncertainty aversion

Sebastian Herrmann; Johannes Muhle-Karbe; Frank Thomas Seifried

We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their "distance" to a reference local volatility model. In the limit for small uncertainty aversion, this leads to explicit formulas for prices and hedging strategies in terms of the security's cash gamma

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Year of publication:	2016
Authors:	Herrmann, Sebastian ; Muhle-Karbe, Johannes ; Seifried, Frank Thomas
Publisher:	Geneva : Swiss Finance Institute
Subject:	volatility uncertainty \| smooth ambiguity aversion \| option pricing and hedging \| asymptotics \| Hedging \| Risikoaversion \| Risk aversion \| Volatilität \| Volatility \| Optionspreistheorie \| Option pricing theory \| Risiko \| Risk \| Entscheidung unter Unsicherheit \| Decision under uncertainty \| Erwartungsnutzen \| Expected utility

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