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The Systematic Risk of Discretely Rebalanced Option Hedges

Published online by Cambridge University Press:  06 April 2009

John E. Gilster Jr
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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).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 4 , December 1990 , pp. 507 - 516
Copyright
Copyright © School of Business Administration, University of Washington 1990

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