Model Risk in Pricing Path-dependent Derivatives: An Illustration

Vineet Virmani

No WP2014-03-22, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Model selection and model uncertainty go hand-in-hand. However, while there is uncertainty associated with the selection of any model, the context is paramount. This study is an illustration of issues surrounding model risk when pricing products whose payoff depends crucially on forward volatility. In particular, we try and quantify model risk associated with pricing of cliquet options using stochastic volatility models.

Date: 2014-03-31
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:12837

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