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Bias Correction for Bond Option Greeks via Jackknife

Jinyu Zhang, Kang Gao and Yong Li
The Journal of Derivatives Fall 2021, jod.2021.1.129; DOI: https://doi.org/10.3905/jod.2021.1.129
Jinyu Zhang
is an assistant professor in the School of Finance at Nanjing Audit University in Nanjing, China
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Kang Gao
is a staff member in the The People’s Bank of China in Beijing, China
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Yong Li
is a professor in the School of Economics at Renmin University of China in Beijing, China and the corresponding author
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Abstract

The underlying models for bond options are often based on some linear drift functions such that the option Greeks depend crucially on the mean reversion parameters. Substantial estimation bias may arise when these parameters are estimated using standard methods such as maximum likelihood estimation, leading to a bias in estimating the Greeks. To address this issue, following Phillips and Yu (2005), a jackknife method is adopted in this article. In particular, we apply the method directly to the estimation of option Greeks, rather than the estimation of parameters. This approach is general and computationally inexpensive; hence, it is convenient in practice. The finite-sample performance is investigated in several Monte Carlo studies. At last, in dynamic Delta hedging, we show that the bias reduction in the estimation of option Greeks using the proposed method can achieve some economic value.

TOPICS: Derivatives, options, fixed income and structured finance, quantitative methods, simulations

Key Findings

  • ▪ Like option pricing, the bias problem is still serious in estimating the Greeks of the options.

  • ▪ The jackknife method is a good method to reduce the estimation bias in estimating the Greeks.

  • ▪ The bias reduction in the estimation of option Greeks using the proposed method can achieve some economic values in option markets around the world.

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The Journal of Derivatives: 28 (3)
The Journal of Derivatives
Vol. 28, Issue 3
Spring 2021
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Bias Correction for Bond Option Greeks via Jackknife
Jinyu Zhang, Kang Gao, Yong Li
The Journal of Derivatives Mar 2021, jod.2021.1.129; DOI: 10.3905/jod.2021.1.129

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Bias Correction for Bond Option Greeks via Jackknife
Jinyu Zhang, Kang Gao, Yong Li
The Journal of Derivatives Mar 2021, jod.2021.1.129; DOI: 10.3905/jod.2021.1.129
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  • Article
    • Abstract
    • JACKKNIFE METHOD FOR BIAS REDUCTION IN CONTINUOUS TIME MODELS
    • SIMULATION STUDIES
    • EMPIRICAL APPLICATIONS
    • CONCLUSION
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