Quotation Frey, Rüdiger, Stremme, Alexander. 1997. Market Volatility and Feedback Effects from Dynamic Hedging. Mathematical Finance 7 (4): 351-374.


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Abstract

In this paper we analyze the manner in which the demand generated by dynamic hedging strategies affects the equilibrium price of the underlying asset. We derive an explicit expression for the transformation of market volatility under the impact of such strategies. It turns out that volatility increases and becomes time and price dependent. The strength of these effects however depends not only on the share of total demand that is due to hedging, but also signifcantly on the heterogeneity of the distribution of hedged payoffs. We finally discuss in what sense hedging strategies derived from the assumption of constant volatility may still be appropriate even though their implementation obviously violates this assumption.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Mathematical Finance
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-B, VW-B, WH-B
Language English
Title Market Volatility and Feedback Effects from Dynamic Hedging
Volume 7
Number 4
Year 1997
Page from 351
Page to 374
URL http://www.math.uni-leipzig.de/~frey/bonnsfb310.pdf

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People
Frey, Rüdiger (Details)
External
Stremme, Alexander
Organization
Institute for Statistics and Mathematics IN (Details)
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