Template-Type:ReDIF-Paper 1.0  
Title:Market Volatility and Feedback Effects from Dynamic Hedging
Author-Name: Frey, Rüdiger 
Author-Name: Alexander Stremme
Classification-JEL:G13 
Keywords:Black--Scholes Model, Dynamic Hedging, Volatility, Option Pricing, Feedback Effects 
Abstract:In this paper we analyze in what way the demand generated by dynamic hedging strategies affects the
	equilibrium prices of the underlying asset. We derive an explicit expression for the transformation of market
	volatility under the impact of hedging. It turns out that market volatility increases and becomes price-dependent.
	The strength of the effects depend not only on the market share of portfolio insurance but also crucially on the
	heterogeneity of insured payoffs. We finally discuss in what sense hedging strategies calculated under the
	assumption of constant volatility are still appropriate, even if this assumption is obviously violated by their
	implementation. 
Length: pages
Creation-Date: 1995-10
Revision-Date: 
Handle: RePEc:bon:bonsfb:310
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb310.pdf
File-Format: application/pdf
File-Size: 285364 bytes