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Risks 2016, 4(4), 35; doi:10.3390/risks4040035

A Note on the Impact of Parameter Uncertainty on Barrier Derivatives

1,†,* and 2,†
1
Western University, London, ON N6A 3K7, Canada
2
Chair of e-Finance, Goethe University Frankfurt, D-60323 Frankfurt am Main, Germany
*
Author to whom correspondence should be addressed.
Academic Editor: Mogens Steffensen
Received: 31 August 2016 / Revised: 31 August 2016 / Accepted: 21 September 2016 / Published: 29 September 2016
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Abstract

This paper presents a comprehensive extension of pricing two-dimensional derivatives depending on two barrier constraints. We assume randomness on the covariance matrix as a way of generalizing. We analyse common barrier derivatives, enabling us to study parameter uncertainty and the risk related to the estimation procedure (estimation risk). In particular, we use the distribution of empirical parameters from IBM and EURO STOXX50. The evidence suggests that estimation risk should not be neglected in the context of multidimensional barrier derivatives, as it could cause price differences of up to 70%. View Full-Text
Keywords: barrier options; estimation risk; random covariance; structured products barrier options; estimation risk; random covariance; structured products
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MDPI and ACS Style

Escobar, M.; Panz, S. A Note on the Impact of Parameter Uncertainty on Barrier Derivatives. Risks 2016, 4, 35.

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