A Bayesian view on autocallable pricing and risk management

Paletta, Tommaso and Tunaru, Radu (2022) A Bayesian view on autocallable pricing and risk management. Journal of Derivatives, 29 (5). pp. 40-59. ISSN 1074-1240

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Abstract

In this article, some insights are presented on the risks associated with trading autocallable financial products. This class of structured products survived the Lehman Brothers collapse in 2008 and the sovereign crisis of 2011 but was deeply affected by the emergence of the COVID-19 pandemic in 2020. This article highlights the important role played by dividend risk, which was neglected until 2020 in the derivatives literature on equity structured products. The article also emphasizes that both equity volatility uncertainty and dividend uncertainty play a crucial role in pricing and risk-managing autocallables. The article uses the Black-Scholes model in a Bayesian setup, demonstrating how volatility uncertainty affects the estimation of dividend yield and vice versa.

Item Type: Article
Schools and Departments: University of Sussex Business School > Accounting and Finance
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 06 Sep 2022 09:05
Last Modified: 12 Sep 2022 13:10
URI: http://sro.sussex.ac.uk/id/eprint/107717

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