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Measuring distribution risk in discrete models

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  • Roberto Fontana
  • Patrizia Semeraro

Abstract

Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of choosing a risk-neutral measure on convex derivative pricing in incomplete markets. We find analytical bounds for prices of European and American options in the class of all risk-neutral measures, and we also find simulated bounds for given classes of perturbations of the minimal martingale equivalent measure.

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  • Roberto Fontana & Patrizia Semeraro, 2023. "Measuring distribution risk in discrete models," Papers 2302.08838, arXiv.org.
    • Handle: RePEc:arx:papers:2302.08838
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    References listed on IDEAS

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