Model Risk in Derivative Pricing:Retrospect and Prospect
Liu Fang-ju · Scientific Decision-Making · 2012
As the financial derivatives have been innovated into ever more complex forms,more and more attention have been paid to the model risk in derivative pricing.This paper firstly reviews the literature relevant to definition and measurement of model risk.Then all aspects of pricing which may result in model risk are studied,including the choice of stochastic process,estimation methods,sample for estimation and pricing models,and the relevant theory,models and methods were also examined.Finally,all aspects of derivative pricing and both the consensus and deficiencies in study of model risk are summarized.Basing on the conclusion,future direction of research was proposed.