Derman and Taleb (The Issusions of Dynamic Hedging, 2005) uncover a seeming anomaly in option pricing theory which suggests that static hedging based on put-call parity provides sufficient theoretical support to justify risk-neutral option pricing. From this they suggest that dynamic hedging as...

Option professionals routinely tweak the Black-Scholes option pricing model using a volatility smile. Using algebraic analysis and Monte Carlo simulation experiments, we compare the hedging performance of the tweaked Black-Scholes option pricing model with a stochastic volatility model in a...

We test the relation between expected and realized excess returns for the S&P 500 index from January 1994 through December 2003 using the proportional reward-to-risk measure to estimate expected returns. When risk is measured by historical volatility, we find no relation between expected and...