Because of transaction costs and other execution problems, hedging portfolios are readjusted only periodically, usually once a day. The question is whether the hedge ratio should reflect the instantaneous variance, the average variance over the life of the option as in the Black-Scholes model,...

We propose a general framework to model equity volatility for a firm financed by equity and additional non-equity sources of funds. The stochastic nature of equity volatility is endogenous, and comes from the impact of a change in the value of the firm's assets on the financial leverage. We...