TY  - JOUR
AU  - Engle,Robert F.
AU  - Rosenberg,Joshua
TI  - Hedging Options in a GARCH Environment: Testing the Term Structure of   Stochastic Volatility Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4958
PY  - 1994
Y2  - December 1994
UR  - http://www.nber.org/papers/w4958
L1  - http://www.nber.org/papers/w4958.pdf
N1  - Author contact info:
Robert F. Engle, III
Department of Finance, Stern School of Business
New York University, Salomon Center
44 West 4th Street, Suite 9-160
New York, NY  10012-1126
Tel: 212/998-0710
Fax: 212/995-4220
E-Mail: rengle@stern.nyu.edu

Joshua Rosenberg
Federal Reserve Bank of New York
33 Liberty Street
New York, NY  10045
E-Mail: Joshua.Rosenberg@ny.frb.org
AB  - This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P 500 index volatility. Volatility models are compared by their ability to hedge options positions sensitive to the term structure of volatility.  Overall, the most effective hedge is a Black-Scholes (BS) delta-gamma hedge, while the BS delta-vega hedge is the least effective.  The most successful volatility hedge is GARCH components delta-gamma, suggesting that the GARCH components estimate of the term structure of volatility is most accurate.  The success of the BS delta-gamma hedge may be due to mispricing in the options market over the sample period.
ER  -