Pricing interest rate derivatives with model risk

Satoshi Hosokawa; Koichi Matsumoto

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Journal of Financial...arrow_drop_down

Journal of Financial Engineering

Article . 2015 . Peer-reviewed

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https://dx.doi.org/10.1142/s23...

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Pricing interest rate derivatives with model risk

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type 01 Mar 2015 English Publisher:World Scientific Pub Co Pte LtJournal:Journal of Financial Engineering, volume 2, page 1,550,003 (issn: 2345-7686, eissn: 2382-5596,

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Authors: Satoshi Hosokawa; Koichi Matsumoto;

doi: 10.1142/s2345768615500038

Pricing interest rate derivatives with model risk

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Abstract

This paper studies an interest rate derivative when there is the model risk in an interest rate model. We consider a mean reverting interest rate process whose volatility model is not known. Most of prices of interest rate derivatives cannot be determined uniquely, based on this interest rate model. We study the price bounds of a derivative and propose how to calculate the price bounds by a trinomial model. Further, we analyze the model risk of derivatives and their portfolios numerically.

Related Organizations

Kyushu University
Japan

45 Research products, page 1 of 5

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