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Seminars

Robust Hedging of Volatility Derivatives

Date: 09-20-2004
Start Time: 6:00pm
End Time: 7:30pm
Speaker: Roger Lee, University of Chicago
Location: 412 Shapiro CEPSR, Davis Auditorium

ABSTRACT

Define the realized variance of a price process S to be the quadratic variation of log(S) from time 0 to time T. (In practice, dealers in variance contracts typically use the sample variance of the daily or weekly returns of S.) By trading in S and in T-expiry European options on S, we replicate derivative contracts which pay out general functions of realized variance, such as its square root, realized volatility.

Unlike previous efforts to hedge general volatility derivatives, we avoid imposing any specific volatility model on the S diffusion. We make only a correlation assumption -- which we then relax, by choosing replication strategies which have robustness against deviations from the correlation condition.

This work is joint with Peter Carr.

BIO

Roger Lee is an Assistant Professor of Mathematics at the University of Chicago. Previously, he was a Szego Assistant Professor of Mathematics at Stanford University, and an NSF Postdoctoral Fellow at NYU's Courant Institute.