Journal of Risk Model Validation

On bounds for model calibration uncertainty

Mikhail V. Deryabin


For a given derivative pricing model and an exotic product, it is natural to ask the following question: if the model prices calibration instruments within their bid-ask spreads (or otherwise, given the model calibration error), what is the uncertainty of the exotic product valuation? This model calibration uncertainty can be defined using Cont's coherent model risk measure. Lower and upper bounds are obtained for this model risk measure that depend only on the model itself and its calibration, not on a particular choice of the modeling parameters. A series of related questions is then discussed.