Analysis of Hedging Profits Under Two Stock Pricing Models英文文献资料.docVIP

Journal of Mathematical Finance, 2011, 1, 120-124 doi:10.4236/jmf.2011.13015 Published Online November 2011 (http://www.SciRP.org/journal/jmf) Analysis of Hedging Profits under Two Stock Pricing Models Lingyan Cao , Zheng-Feng Guo 1 2 Department of Mathematics, University of Maryland, Maryland, USA Department of Economics, Vanderbilt University, Nashville, USA E-mail: {lingyancao, gzfsadie}@ 1 2 Received August 29, 2011; revised October 13, 2011; accepted October 22, 2011 Abstract In this paper, we employ two stock pricing models: a Black-Scholes (BS) model and a Variance Gamma (VG) model, and apply the maximum likelihood method (MLE) to estimate corresponding parameters in each model. With the estimated parameters, we conduct Monte Carlo simulations to simulate spot prices and deltas of the European call option at different time spots over different sample paths. We focus on calculate- ing the deltas for the two models by the method of the in?nitesimal perturbation analysis (IPA). Then, we employ dynamic delta hedging using the simulated spot prices and deltas for different hedging periods. Fi- nally, hedging profits under these two models are calculated and analyzed. Keywords: Likelihood Ratio, Variance Gamma, Geometric Brownian Motion, Delta Hedge 1. Introduction focus on estimating deltas by IPA method in this paper. In this paper, we assume two stock pricing models, one is the classical Black-Scholes (BS) model, in which the stock prices follows a geometric Brownian motion (GBM) process; another is the Variance Gamma (VG) model, in which stock prices follow a VG model. The BS model was first introduced by [8] and [9] to the finance community as a model for stock prices and option pricing; while the VG process was introduced for log-price returns and op- tion pricing by [10], and further developed in [11,12]. A general review of the VG process in the context of sto- chastic M