Pricing interest rate derivatives with model risk

Satoshi Hosokawa and Koichi Matsumoto ()
Additional contact information
Satoshi Hosokawa: Graduate School of Economics, Kyushu University, Fukuoka, Japan
Koichi Matsumoto: Department of Economic Engineering, Faculty of Economics, Kyushu University 6-19-1 Hakozaki Higashi-ku, Fukuoka-shi, Fukuoka 812-8581, Japan

Journal of Financial Engineering (JFE), 2015, vol. 02, issue 01, 1-18

Abstract: This paper studies an interest rate derivative when there is the model risk in an interest rate model. We consider a mean reverting interest rate process whose volatility model is not known. Most of prices of interest rate derivatives cannot be determined uniquely, based on this interest rate model. We study the price bounds of a derivative and propose how to calculate the price bounds by a trinomial model. Further, we analyze the model risk of derivatives and their portfolios numerically.

Keywords: Interest rate derivatives; model risk; uncertainty of parameter; G13; D81; C61 (search for similar items in EconPapers)
Date: 2015
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2345768615500038
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:jfexxx:v:02:y:2015:i:01:n:s2345768615500038

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2345768615500038

Access Statistics for this article

Journal of Financial Engineering (JFE) is currently edited by George Yuan

More articles in Journal of Financial Engineering (JFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().