Model Risk And Model Choice In The Case Of Barrier Options
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| Author | : Rainer Baule |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2019 |
| Genre | : |
| ISBN | : |
We analyze model risk for the pricing of barrier options. In contrast to existing literature, this paper is based on an empirical data set of over 40,000 bonus certificates to analyze the real market extent of model risk for traded barrier options instead of purely synthetic options. For this purpose a local volatility model, the Heston model and the Bates model are applied. Furthermore, we add to the literature on the behavior of issuers of retail derivatives in terms of model choice. We find evidence that the majority of the issuers prefer stochastic volatility over local volatility models, while they do not use the even more realistic Bates model which incorporates jumps in the underlying.
| Author | : Cathrine Jessen |
| Publisher | : |
| Total Pages | : 12 |
| Release | : 2009 |
| Genre | : |
| ISBN | : |
In this paper the empirical performance of alternative models for barrier option valuation and risk management is studied. Five commonly used models are compared: the Black-Scholes model, the constant elasticity of variance model, the Heston stochastic volatility model, the Merton jump-diffusion model, and the infinite activity Variance Gamma model. We employ time-series data from the USD/EUR exchange rate market, and use plain vanilla option prices as well as a unique data-set of observed market values of barrier options. The different models are calibrated to the plain vanilla option prices, and cross-sectional and predicted pricing errors for both plain vanilla and barrier options are investigated. For the plain vanilla options the Heston model has superior performance both in cross-section and for prediction horizons of up to one month, with its closest competitors being the Merton and the Variance Gamma models. For the barrier options, the Heston model has a slightly, but not significantly, better performance than the continuous alternatives Black-Scholes and constant elasticity of variance, while both models with jumps(Merton and Variance Gamma) perform markedly worse.
| Author | : Massimo Morini |
| Publisher | : John Wiley & Sons |
| Total Pages | : 452 |
| Release | : 2011-10-20 |
| Genre | : Business & Economics |
| ISBN | : 0470977744 |
A guide to the validation and risk management of quantitative models used for pricing and hedging Whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this literature--the risks of the models themselves. This book starts from regulatory issues, but translates them into practical suggestions to reduce the likelihood of model losses, basing model risk and validation on market experience and on a wide range of real-world examples, with a high level of detail and precise operative indications.
| Author | : Robert Buff |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 246 |
| Release | : 2012-12-06 |
| Genre | : Mathematics |
| ISBN | : 3642563236 |
This is one of the only books to describe uncertain volatility models in mathematical finance and their computer implementation for portfolios of vanilla, barrier and American options in equity and FX markets. Uncertain volatility models place subjective constraints on the volatility of the stochastic process of the underlying asset and evaluate option portfolios under worst- and best-case scenarios. This book, which is bundled with software, is aimed at graduate students, researchers and practitioners who wish to study advanced aspects of volatility risk in portfolios of vanilla and exotic options. The reader is assumed to be familiar with arbitrage pricing theory.
| Author | : Junling Hu |
| Publisher | : |
| Total Pages | : 170 |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
Abstract: The project investigates the prices of barrier options from the constant underlying volatility in the Black-Scholes model to stochastic volatility model in SABR framework. The constant volatility assumption in derivative pricing is not able to capture the dynamics of volatility. In order to resolve the shortcomings of the Black-Scholes model, it becomes necessary to find a model that reproduces the smile effect of the volatility. To model the volatility more accurately, we look into the recently developed SABR model which is widely used by practitioners in the financial industry. Pricing a barrier option whose payoff to be path dependent intrigued us to find a proper numerical method to approximate its price. We discuss the basic sampling methods of Monte Carlo and several popular variance reduction techniques. Then, we apply Monte Carlo methods to simulate the price of the down-and-out put barrier options under the Black-Scholes model and the SABR model as well as compare the features of these two models.
| Author | : Rajna Gibson |
| Publisher | : Risk Publications |
| Total Pages | : 378 |
| Release | : 2000 |
| Genre | : Business & Economics |
| ISBN | : |
A comprehensive compilation on the concept of model risk and the potential pitfalls associated with modelling financial risks, this book provides an assessment of various models, examining the weaknesses and provides methods to mitigate potential model failures and deficiencies. It also covers the testing of models, what should be tested and what the parameters should be, with core contributions selected and introduced by Professor Rajna Gibson.
| Author | : Nassim Nicholas Taleb |
| Publisher | : John Wiley & Sons |
| Total Pages | : 536 |
| Release | : 1997-01-14 |
| Genre | : Business & Economics |
| ISBN | : 9780471152804 |
Destined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
| Author | : Don R. Rich |
| Publisher | : |
| Total Pages | : 418 |
| Release | : 1993 |
| Genre | : Default (Finance) |
| ISBN | : |
| Author | : Fabrice D. Rouah |
| Publisher | : John Wiley & Sons |
| Total Pages | : 456 |
| Release | : 2012-06-15 |
| Genre | : Business & Economics |
| ISBN | : 1118429206 |
This comprehensive guide offers traders, quants, and students the tools and techniques for using advanced models for pricing options. The accompanying website includes data files, such as options prices, stock prices, or index prices, as well as all of the codes needed to use the option and volatility models described in the book. Praise for Option Pricing Models & Volatility Using Excel-VBA "Excel is already a great pedagogical tool for teaching option valuation and risk management. But the VBA routines in this book elevate Excel to an industrial-strength financial engineering toolbox. I have no doubt that it will become hugely successful as a reference for option traders and risk managers." —Peter Christoffersen, Associate Professor of Finance, Desautels Faculty of Management, McGill University "This book is filled with methodology and techniques on how to implement option pricing and volatility models in VBA. The book takes an in-depth look into how to implement the Heston and Heston and Nandi models and includes an entire chapter on parameter estimation, but this is just the tip of the iceberg. Everyone interested in derivatives should have this book in their personal library." —Espen Gaarder Haug, option trader, philosopher, and author of Derivatives Models on Models "I am impressed. This is an important book because it is the first book to cover the modern generation of option models, including stochastic volatility and GARCH." —Steven L. Heston, Assistant Professor of Finance, R.H. Smith School of Business, University of Maryland
| Author | : Zareer Dadachanji |
| Publisher | : Springer |
| Total Pages | : 360 |
| Release | : 2016-04-29 |
| Genre | : Business & Economics |
| ISBN | : 1137462752 |
Barrier options are a class of highly path-dependent exotic options which present particular challenges to practitioners in all areas of the financial industry. They are traded heavily as stand-alone contracts in the Foreign Exchange (FX) options market, their trading volume being second only to that of vanilla options. The FX options industry has correspondingly shown great innovation in this class of products and in the models that are used to value and risk-manage them. FX structured products commonly include barrier features, and in order to analyse the effects that these features have on the overall structured product, it is essential first to understand how individual barrier options work and behave. FX Barrier Options takes a quantitative approach to barrier options in FX environments. Its primary perspectives are those of quantitative analysts, both in the front office and in control functions. It presents and explains concepts in a highly intuitive manner throughout, to allow quantitatively minded traders, structurers, marketers, salespeople and software engineers to acquire a more rigorous analytical understanding of these products. The book derives, demonstrates and analyses a wide range of models, modelling techniques and numerical algorithms that can be used for constructing valuation models and risk-management methods. Discussions focus on the practical realities of the market and demonstrate the behaviour of models based on real and recent market data across a range of currency pairs. It furthermore offers a clear description of the history and evolution of the different types of barrier options, and elucidates a great deal of industry nomenclature and jargon.
