385. A simulation approach to robust risk management of derivative products
Invited abstract in session WC-9: Methods and models in portfolio and risk management, stream OR in Finance and Insurance .
Wednesday, 12:30-14:00Room: Clarendon SR 2.01
Authors (first author is the speaker)
| 1. | Bertrand Tavin
|
| EMLYON Business School |
Abstract
This paper considers the problem of assessing and hedging the risk carried by a portfolio of non-standard derivative products managed with a family of parametric models. We first formalize the problem and define the framework in which it can be solved by using a constrained simulation approach with respect to model parameters. Our approach is suitable for an agent who may be agnostic with respect to a prior model and who may wish to account for expert views on the range of possible model parameters. Instead of breaking them into several sub-problems, the proposed methodology has the important advantage to answer the risk measurement and robust hedging questions in one step. Namely, the agent needs to run the simulation just once to get the desired answers. We present numerical results obtained with recent market data when applying the method to a portfolio of variance swaps and forward-start options valued with models stochastic volatility and jumps. In addition, our method can easily accommodate additional features such as cardinality constraints for the robust hedging strategy or transaction costs.
Keywords
- Simulation
- Risk Analysis and Management
- Robust Optimization
Status: accepted
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