In the modern finance literature, much attention has been paid to the pricing of many kinds of derivatives using all kinds of derivative pricing models. Generally the hedging strategy prescribed by these models is used to hedge the derivatives. Although it is commonly understood that none of the model settings used for these prices and hedging strategies fit the market environment, little research has been done concerning the risk involved in misspecification of the models. The term "model risk" will be used to indicate the risk that results from the mismatch between model assumptions and reality. Exposure to model risk can be reduced by the use of robust hedging strategies. A hedging strategy will be called "robust" if it performs well under a wide range of model assumptions. It is the purpose of this research project to quantify model risk and to develop robust hedging strategies.
|Short title||Model risk and robust hedging|
|Effective start/end date||1/06/99 → 1/06/03|