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Model Error in Contingent Claim Models (Dynamic Evaluation).

Authors
Disciplines
  • Logic

Abstract

This paper formally incorporates parameter uncertainty and model error into the estimation of contingent claim models and the formulation of forecasts. This allows inference on functions of interest (option values, bias functions, hedge ratios) consistent with uncertainty in both parameters and models. We show how to recover the exact posterior distributions of the parameters or any function of the parameters.

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