Abstract:
This paper provides comparative theoretical and numerical results on risks, values, and hedging
strategies for local risk-minimization versus mean-variance hedging in a class of stochastic volatility
models. We explain the theory for both hedging approaches in a general framework, specialize to
a Markovian situation, and analyze in detail variants of the well-known Heston (1993) and Stein
and Stein (1991) stochastic volatility models. Numerical results are obtained mainly by PDE and -
simulation methods. In addition, we take special care to cbeck that all of our examples do satisfy
the conditions required by the general theory.
