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Pricing autocallables under local-stochastic volatility

Farkas, Walter; Ferrari, Francesco; Ulrych, Urban (2024). Pricing autocallables under local-stochastic volatility. In: Yarrow, Robert A; Madan, Dilip. Peter Carr Gedenkschrift: Research Advances in Mathematical Finance. Singapore: World Scientific Pulishing, 329-378.

Abstract

This chapter investigates the pricing of single-asset autocallable barrier reverse convertibles in the Heston local-stochastic volatility (LSV) model. Despite their complexity, autocallable structured notes are the most traded equity-linked exotic derivatives. The autocallable payoff embeds an early redemption feature generating strong path and model dependency. Consequently, the commonly used local volatility (LV) model is overly simplified for pricing and risk management. Given its ability to match the implied volatility smile and reproduce its realistic dynamics, the LSV model is, in contrast, better suited for exotic derivatives, such as autocallables. We use quasi-Monte Carlo methods to study the pricing given the Heston LSV model and compare it with the LV model. In particular, we establish the sensitivity of the valuation differences of autocallables between the two models with respect to pay-off features, model.

Additional indexing

Item Type:Book Section, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2024
Deposited On:04 Jan 2024 15:01
Last Modified:27 Sep 2024 03:41
Publisher:World Scientific Pulishing
ISBN:9789811280290
OA Status:Closed
Publisher DOI:https://doi.org/10.1142/9789811280306_fmatter
Other Identification Number:merlin-id:24197
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