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Probability and Math Finance Seminar

Uwe Wystup, Frankfurt School of Finance and Management

On the Cost of Poor Volatility Modeling - The Case of Cliquets


We have conducted pricing and hedging experiments in order to check whether simple stochastic volatility models are capable to capture the forward volatility and forward skew risks correctly. As a reference we have used the Bergomi model that treats these risks accurately per definition. Results of our experiments show that the cost of poor volatility modeling in the Heston model, the Barndorff-Nielsen-Shephard model and a Variance-Gamma model with stochastic arrival is too high when pricing and hedging cliquet options.

Authors: Fiodar Kilin, Quanteam AG Morten Nalholm, Department of Mathematical Sciences, University of Copenhagen Uwe Wystup, Math Finance AG and Frankfurt School of Finance & Management

MONDAY, April 21, 2008
Time: 5:00 P.M.
Location: WeH 6423