Abstract
AbstractThis study examines the quantitative impact of correlation errors on basket options with time‐varying correlations and the risk measures (conditional) value‐at‐risk (VaR) in the framework of Basel II. The results show that risk measure misestimation due to correlation errors are the largest and most asymmetric for the at‐the‐money and out‐of‐the‐money basket option. Delta hedging of the basket option reduces risk but increases size and asymmetry effects substantially. Finally, the square‐root‐of‐time rule for VaR does not adjust adequately to correlation errors and consistently underestimates risk measures, which could lead to the VaR exceedance clustering observed during the recent financial crisis. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
