A1969
Title: A comparison of quantitative finance models for hedging of options portfolio
Authors: Maciej Wysocki - University of Warsaw (Poland) [presenting]
Robert Slepaczuk - University of Warsaw (Poland)
Abstract: A comprehensive comparison of quantitative finance models used for the valuation and hedging of options is presented. The focus is twofold: the theoretical aspects of the tested models and the practical implementation of these models in options trading. The importance of this issue is supported by the fact that financial institutions hold increasingly large portfolios of options constructed with complex investment strategies and market-making processes, and their actions can significantly impact the market. Therefore, adequate risk estimation and portfolio hedging become crucial elements of investment activities, especially during periods of rapid volatility fluctuations. Thus, the effectiveness of hedging strategies was assessed in both low and high-market volatility regimes. The considered models include the Black-Scholes-Merton model as well as the Variance-Gamma model based on Levy processes. The selection of these methodologies is based on an extensive literature review. The empirical part of the study was based on high-frequency, 1-minute option prices and index quotes from CBOE during the period from 2018 to 2022. We implemented algorithmic trading strategies for options based on the concept of the volatility risk premium. Based on these results, we quantitatively assessed the performance of all the models in hedging a portfolio of options within actual trading strategies.
