Pricing range notes within Wishart affine models

Carl Chiarella, José Da Fonseca and Martino Grasselli

Insurance: Mathematics and Economics, 2014, vol. 58, issue C, 193-203

Abstract: We provide analytic pricing formulas for Fixed and Floating Range Accrual Notes within the multifactor Wishart affine framework which extends significantly the standard affine model. Using estimates for three short rate models, two of which are based on the Wishart process whilst the third one belongs to the standard affine framework, we price these structured products using the FFT methodology. Thanks to the Wishart tractability the hedge ratios are also easily computed. As the models are estimated on the same dataset, our results illustrate how the fit discrepancies (meaning differences in the likelihood functions) between models translate in terms of derivatives pricing errors, and we show that the models can produce different price evolutions for the Range Accrual Notes. The differences can be substantial and underline the importance of model risk both from a static and a dynamic perspective. These results are confirmed by an analysis performed at the hedge ratios level.

Keywords: Term structure models; Wishart models; Range accrual notes (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:58:y:2014:i:c:p:193-203

DOI: 10.1016/j.insmatheco.2014.07.008

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