Calibration risk for exotic options

  title={Calibration risk for exotic options},
  author={Kai Detlefsen and Wolfgang K. H{\"a}rdle},
Option pricing models are calibrated to market data of plain vanillas by minimization of an error functional. From the economic viewpoint, there are several possibilities to measure the error between the market and the model. These different specifications of the error give rise to different sets of calibrated model parameters and the resulting prices of exotic options vary significantly. These price differences often exceed the usual profit margin of exotic options. We provide evidence for… CONTINUE READING


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