Asia-Pacific Financial Markets

, Volume 22, Issue 2, pp 151–184 | Cite as

Understanding Delta-Hedged Option Returns in Stochastic Volatility Environments

Article

Abstract

In this paper, we provide a novel representation of delta-hedged option returns in a stochastic volatility environment. The representation of delta-hedged option returns provided in this paper consists of two terms: volatility risk premium and parameter estimation risk. In an empirical analysis, we examine delta-hedged option returns based on the result of a historical simulation with the USD-JPY currency option market data from October 2003 to June 2010. We find that the delta-hedged option returns for OTM put options are strongly affected by parameter estimation risk as well as the volatility risk premium, especially in the post-Lehman shock period.

Keywords

Delta-hedged option returns Stochastic volatility   Parameter estimation risk Volatility risk premium Currency option 

JEL Classification

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Copyright information

© Springer Japan 2014

Authors and Affiliations

  1. 1.Graduate School of International Corporate StrategyHitotsubashi UniversityChiyoda-kuJapan

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