Analysis of Calibration Risk for Exotic Options through a Resampling Technique

Option pricing models are calibrated to market data of plain vanilla options by minimization of an error functional. In this context, calibration risk arises due to the estimation error of calibrated model parameters and... [ view full abstract ]

Option pricing models are calibrated to market data of plain vanilla options by minimization of an error functional. In this context, calibration risk arises due to the estimation error of calibrated model parameters and carries over to the price of exotic options. The aim of this work is to provide an empirical evidence of calibration risk across popular option pricing models and  to explore the implications for the pricing of some exotic options through a resampling technique. Furthermore, we perform a sensitivity analysis along the lines proposed in Baucells and Borgonovo (2013).