Model risk analysis for risk management and option pricing

F.L.J. Kerkhof

Research output: ThesisDoctoral Thesis

719 Downloads (Pure)

Abstract

Due to the growing complexity of products in financial markets, market participants rely more and more on quantitative models for trading and risk management decisions. This introduces a fairly new type of risk, namely, model risk. In the first part of this thesis we investigate the quantitative influence of model risk on risk management with a main focus on regulation issues. We present frameworks for measuring model risk and backtesting procedures for evaluating model quality. Furthermore, we apply these frameworks to derivatives portfolios. The second part of the thesis concerns interest rate derivatives pricing models. We compare Libor market and discrete string models and find them observationally equivalent. Furthermore, we investigate the factor dependence and estimation risk for a range of exotic derivatives priced with these models.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Tilburg University
Supervisors/Advisors
  • Melenberg, Bertrand, Co-promotor
  • Schumacher, Hans, Promotor
Award date7 Nov 2003
Place of PublicationTilburg
Publisher
Print ISBNs9056681249
Publication statusPublished - 2003

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