In this paper the performance of locally risk-minimizing delta hedgestrategies for European options in stochastic volatility models is studied froman experimental as well as from an empirical perspective. These hedgestrategies are derived for a large class of diffusion-type stochasticvolatility models, and they are as easy to implement asusual delta hedges. Our simulation results on model risk show that theserisk-minimizing hedges are robust with respect to uncertainty andmisconceptions about the underlying data generating process. The empiricalstudy, which includes the U.S. sub-prime crisis period,documents that in equity markets risk-minimizing delta hedgesconsistently outperform usual delta hedges by approximately halvingthe standard deviation of the profit-and-loss ratio.
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