HEDGING BARRIER OPTIONS IN GARCH MODELS WITH TRANSACTION COSTS

摘要

This study proposes a modified strike-spread method for hedging barrier options in generalized autoregressive conditional heteroskedasticity (GARCH) models with transaction costs. A simulation study was conducted to investigate the hedging performance of the proposed method in comparison with several well-known static methods for hedging barrier options. An accurate, easy-to-implement and fast scheme for generating the first passage time under the GARCH framework which enhances the accuracy and efficiency of the simulation is also proposed. Simulation results and an empirical study using real data indicate that the proposed approach has a promising performance for hedging barrier options in GARCH models when transaction costs are taken into consideration.