Regime-Dependent Smile-Adtusted Delta Hedging

摘要

We introduce several regime-dependent smile-adjusted deltas and compare their efficiency with the smile-adjusted deltas that are popular with option traders. Using 161/2 years of daily option prices, out-of-sample hedging performance tests for options of all moneyness and maturities and daily, weekly, or fortnightly rebalancing show that even the simplest regime-dependent smile-adjustment consistently outperforms implied BSM delta hedging and local volatility and minimum variance smile-adjustments. Markov-switching deltas offer the best performance, with delta-hedging errors often half the size of implied BSM hedging errors. During volatile markets risk reduction from regime-dependent delta hedging is much greater than during tranquil periods.