Pricing interest rate derivatives with model risk

Hosokawa, Satoshi; Matsumoto, Koichí

doi:10.1142/s2345768615500038

Cited by 2 publications

(3 citation statements)

References 17 publications

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“…Proceedings of the 47th ISCIE International Symposium on Stochastic Systems Theory and Its Applications Honolulu, Dec. [5][6][7][8]2015 The price process of the saving account is defined by…”

Section: Setupmentioning

confidence: 99%

“…From (8) and (11), W (0, S * 0 ) can be interpreted as the minimum super-hedging cost and the corresponding super-hedging strategy is…”

Section: Remark 31 the Optimal Parameterσ Is Composed Of Volatility mentioning

confidence: 99%

“…And we consider both a positive correlation process and a negative correlation process. In a similar way to Hosokawa and Matsumoto [8], the model risk of a derivative is studied based on the model risk ratio, that is,…”

Section: Proofmentioning

confidence: 99%

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Model Risk of two Assets Derivatives

Ichikawa

Matsumoto

2016

Stochastic Systems Theory and its Applications (SSS)

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This paper studies a derivative on two assets when there is a model risk. We consider a two-dimensional Black Scholes model whose parameter processes are two drift processes, two volatility processes and one correlation process. It is assumed that true models of all parameter processes are unknown. Usually it is impossible to find a unique price of the derivative in this framework. Our problem is to find the price bounds of the derivative. We show a partial differential equation which the maximum price or the minimum price satisfies. To calculate the price bounds numerically, we propose a two-dimensional trinomial model and we study the model risk of options and their portfolio by a numerical analysis.

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Section: Setupmentioning

confidence: 99%

“…From (8) and (11), W (0, S * 0 ) can be interpreted as the minimum super-hedging cost and the corresponding super-hedging strategy is…”

Section: Remark 31 the Optimal Parameterσ Is Composed Of Volatility mentioning

confidence: 99%

See 1 more Smart Citation

Model Risk of two Assets Derivatives

Ichikawa

Matsumoto

2016

Stochastic Systems Theory and its Applications (SSS)

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Mean–variance hedging with model risk

Matsumoto

2017

J. Finan. Eng.

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This paper studies a hedging problem of a derivative security in a one-period model when there is the model risk. The hedging error is measured by a quadratic criterion. The model risk means that the true model is uncertain and there are many candidates for the true model. The true model is assumed to be in a set of models. We study an optimal strategy which minimizes the worst-case hedging error over all models in the set. We show how to calculate an optimal strategy and the minimum hedging error effectively. Finally we give some numerical examples to demonstrate the usefulness of our method.

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Pricing interest rate derivatives with model risk

Cited by 2 publications

References 17 publications

Model Risk of two Assets Derivatives

Model Risk of two Assets Derivatives

Mean–variance hedging with model risk

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