Abstract

http://ssrn.com/abstract=2031129
 


 



Model Risk Using Stochastic Volatility and Levy Models


Manuel Wittke


Deloitte & Touche - Financial Risk Solutions

Joerg Kienitz


Deutsche Postbank AG

March 29, 2012


Abstract:     
Motivated by discrepancies of the Black & Scholes model with observed market data, stochastic volatility and Levy models are often seen as an alternative. These models are capable of mimicking real world price processes and replicating implied option volatilities for plain-vanilla products. However, their impact on risk management and the valuation of path dependent derivatives is not as clear. In a first step we examine the robustness of stochastic volatility and Levy models together with FFT valuation methods by simulations studies. Using daily DAX data for over 5 years including the financial subprime crisis we also investigate their robustness in a real market setting. In detail, we look into calibration errors, price differences of exotic options and loss distributions of several hedge strategies.

Keywords: Stochastic Volatility, Levy Models, FFT, Hedge Strategies, Calibration, Exotic Options

JEL Classification: C63, G12, G13

working papers series


Not Available For Download

Date posted: March 31, 2012  

Suggested Citation

Wittke, Manuel and Kienitz, Joerg, Model Risk Using Stochastic Volatility and Levy Models (March 29, 2012). Available at SSRN: http://ssrn.com/abstract=2031129

Contact Information

Manuel Wittke (Contact Author)
Deloitte & Touche - Financial Risk Solutions ( email )
Germany
Joerg Kienitz
Deutsche Postbank AG ( email )
Friedrich-Ebert-Allee 114-126
Bonn, 53113
Germany
HOME PAGE: http://www.postbank.de
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