SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
Humble
Topic Author
Posts: 1
Joined: August 29th, 2018, 8:30 pm

Dupire vs Stochastique volatility : Vomma risk analysis

April 4th, 2020, 1:39 pm

Suppose that you are short an option on asset Xt  following a pure diffusion. Suppose you are hedging your position using (Dupire) Local volatility model.  Knowing that the option is concave with respect to the volatility, thus the second derivative with respect to the volatility is negative (ie having negative vomma).

Question : at what level of certainty we can say that the local volatility model will produce conservative price ? Is accounting for a stochastic behavior for the volatility will always result in smaller price in this case ?
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On