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https://doi.org/10.1214/07-AIHP148

has been cited by the following article:

• TITLE: Option Pricing and Hedging for Discrete Time Regime-Switching Models

  AUTHORS: Bruno Rémillard, Alexandre Hocquard, Hugo Lamarre, Nicolas Papageorgiou

  KEYWORDS: Option Pricing, Dynamic Hedging, Regime-Switching, Goodness-of-Fit, Hidden Markov Models

  JOURNAL NAME: Modern Economy, Vol.8 No.8, August 4, 2017

  ABSTRACT: We propose optimal mean-variance dynamic hedging strategies in discrete time under a multivariate Gaussian regime-switching model. The methodology, which also performs pricing, is robust to time-varying and clustering risk observed in financial time series. As such, it overcomes the main theoretical drawbacks of the Black-Scholes model. To support our approach, we provide goodness-of-fit tests to validate the model and for choosing the appropriate number of regimes, and we illustrate the methodology using monthly S & P 500 vanilla options prices. Then, we present the associated out-of-sample hedging results in the context of harvesting the implied versus realized volatility premium. Using the proposed methodology, the Sharpe ratio derived from the strategy doubles over the Black-Scholes delta-hedging methodology.