Option Pricing and Hedging with Temporal Correlations
classification
❄️ cond-mat
keywords
correlationsblack-scholescorrelatedformulahedgingincrementsnon-gaussianoption
read the original abstract
We consider the problem of option pricing and hedging when stock returns are correlated in time. Within a quadratic-risk minimisation scheme, we obtain a general formula, valid for weakly correlated non-Gaussian processes. We show that for Gaussian price increments, the correlations are irrelevant, and the Black-Scholes formula holds with the volatility of the price increments on the scale of the re-hedging. For non-Gaussian processes, further non trivial corrections to the `smile' are brought about by the correlations, even when the hedge is the Black-Scholes Delta-hedge. We introduce a compact notation which eases the computations and could be of use to deal with more complicated models.
This paper has not been read by Pith yet.
discussion (0)
Sign in with ORCID, Apple, or X to comment. Anyone can read and Pith papers without signing in.