Misspecified asset price models and robust hedging strategies

The Black-Scholes theory of option pricing requires a perfectly specified model for the underlying price. Frequently this is taken to be a geometric Brownian motion with a constant, known volatility. In practice, parameters such as the volatility are not known precisely, but are simply estimates from either historical prices or implied volatilities. This paper presents a method for constructing hedging (trading) strategies which are 'robust' to misspecifications of the asset price model.