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@article{ Poulsen2009, title = {Risk minimization in stochastic volatility models: model risk and empirical performance}, author = {Poulsen, Rolf and Schenk-Hoppé, Klaus Reiner and Ewald, Christian-Oliver}, journal = {Quantitative Finance}, number = {6}, pages = {693-704}, volume = {9}, year = {2009}, doi = {https://doi.org/10.1080/14697680902852738}, urn = {https://nbn-resolving.org/urn:nbn:de:0168-ssoar-221553}, abstract = {In this paper the performance of locally risk-minimizing delta hedge strategies for European options in stochastic volatility models is studied from an experimental as well as from an empirical perspective. These hedge strategies are derived for a large class of diffusion-type stochastic volatility models, and they are as easy to implement as usual delta hedges. Our simulation results on model risk show that these risk-minimizing hedges are robust with respect to uncertainty and misconceptions about the underlying data generating process. The empirical study, which includes the U.S. sub-prime crisis period, documents that in equity markets risk-minimizing delta hedges consistently outperform usual delta hedges by approximately halving the standard deviation of the profit-and-loss ratio.}, }