Orientador(es)
Resumo(s)
The growth experimented in recent years in both the variety and volume of structured products implies that banks and other financial institutions have become increasingly exposed to model risk. In this article we focus on the model risk associated with the local volatility (LV) model and with the Variance Gamma (VG) model. The results show that the LV model performs
better than the VG model in terms of its ability to match the market prices of European options. Nevertheless, both models are subject to significant pricing errors when compared with the stochastic volatility framework.
Descrição
Palavras-chave
Model risk Exotic options Local volatility Stochastic volatility Variance Gamma process Path dependence