A Note on the Impact of Parameter Uncertainty on Barrier Derivatives

Marcos Escobar Anel () and Sven Panz
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Sven Panz: Chair of e-Finance, Goethe University Frankfurt, D-60323 Frankfurt am Main, Germany

Risks, 2016, vol. 4, issue 4, 1-25

Abstract: This paper presents a comprehensive extension of pricing two-dimensional derivatives depending on two barrier constraints. We assume randomness on the covariance matrix as a way of generalizing. We analyse common barrier derivatives, enabling us to study parameter uncertainty and the risk related to the estimation procedure (estimation risk). In particular, we use the distribution of empirical parameters from IBM and EURO STOXX50. The evidence suggests that estimation risk should not be neglected in the context of multidimensional barrier derivatives, as it could cause price differences of up to 70%.

Keywords: barrier options; estimation risk; random covariance; structured products (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:4:y:2016:i:4:p:35-:d:79467

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