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...

When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution...

This paper deals with the superhedging of derivatives on incomplete markets, i.e. with portfolio strategies which generate payoffs at least as high as that of a given contingent claim. The simplest solution to this problem is in many cases a static superhedge, i.e. a buy-and-hold strategy...

This paper deals with the problem of quadratic hedging with limited initial capital. We show (i) that the optimal amount of capital for the quadratic hedge of a portfolio of contingent claims is equal to the sum of optimal investments for the individual hedges of its components and (ii) that the...

In this paper we consider the question which path-independent claims are attainable through self-financing trading strategies in an incomplete market. We show for continuous-time stochastic volatility models and for models exhibiting both stochastic volatility and jumps that from this special...

Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our pape explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor...

This paper analyzes tractable robust hedging strategies in diffusion-type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as volatility stays within a given interval. It does not depend on the exact specification of the volatility process and...