1998/07/04 by D. F. Wang, Wang, D. F.
Economics, Econometrics and Finance · #Economic theories and models #FOS: Economics and business #FOS: Physical sciences #Financial Markets and Investment Strategies #Pricing of Securities (q-fin.PR) #Statistical Mechanics (cond-mat.stat-mech) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.cond-mat/9807066
openalex publication_date 1998/07/04 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
In this work, I address the issue of forming riskless hedge in the continuous time option pricing model with stochastic stock volatility. I show that it is essential to verify whether the replicating portfolio is self-financing, in order for the theory to be self-consistent. The replicating methods in existing finance literature are shown to violate the self-financing constraint when the underlying asset has stochastic volatility. Correct self-financing hedge is formed in this article.