Journal of Financial and Quantitative Analysis Vol. 25 No. 4 1990
The Systematic Risk of Discretely Rebalanced Option Hedges
Abstract
This paper demonstrates that Black-Scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals. This systematic risk may have biased important empirical tests of the option pricing model. Moreover, this systematic risk means that the Black-Scholes option pricing model is inherently inconsistent with the discrete time version of the Capital Asset Pricing Model (CAPM).
- DOI
- 10.2307/2331013
- Volume
- 25
- Issue
- 4
- Pages
- 507
- Sources
- crossref openalex