2011/02/17 by Alberto Elices, Elices, Alberto, Eduard Giménez +1
Decision Sciences · Economics, Econometrics and Finance · Social Sciences · #FOS: Economics and business #Insurance, Mortality, Demography, Risk Management #Pricing of Securities (q-fin.PR) #Risk Management (q-fin.RM) #Risk and Portfolio Optimization #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1102.3534
openalex publication_date 2011/02/17 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper introduces a relative model risk measure of a product priced with a given model, with respect to another reference model for which the market is assumed to be driven. This measure allows comparing products valued with different models (pricing hypothesis) under a homogeneous framework which allows concluding which model is the closest to the reference. The relative model risk measure is defined as the expected shortfall of the hedging strategy at a given time horizon for a chosen significance level. The reference model has been chosen to be Heston calibrated to market for a given time horizon (this reference model should be chosen to be a market proxy). The method is applied to estimate and compare this relative model risk measure under volga-vanna and Black-Scholes models for double-no-touch options and a portfolio of forward fader options.