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nikol


Total Posts: 1456
Joined: Jun 2005
 
Posted: 2022-06-05 15:47
Traders backtest and monitor their option pricing models. Papers talk about advantages of their pricing model, but few support it with backtest statement.
I am a bit "lazy", hence looking for backtest summaries of various pricing models and discussion about conditions under which a model performs well (E[PnL]="Realized" PnL) and when it is underperforming. Hopefully, someone has done such job and I just cannot find it...
I am interested in underwriter perspective, when the premium received is adequate to the risks taken.

... What is a man
If his chief good and market of his time
Be but to sleep and feed? (c)

silverside


Total Posts: 1455
Joined: Jun 2004
 
Posted: 2022-06-27 10:37
if I remember correctly Rebonato covered this in one of his books (the discussion about the time was about whether it was better to hedge vanilla options using realised or implied volatility, looking at the variance of the residual PnL, rather than anything more high faluting).

many of the larger houses would have written backtesting engines but i haven't seen anything more general published.

NIP247


Total Posts: 559
Joined: Feb 2005
 
Posted: 2022-06-27 13:10
Nikol, what's the workflow you imagine to test a pricing model? E.g. Systematically trading and using the specific model's greeks to hedge (and compare realised P&L variance vs expected)?

On your straddle, done on the puts, working the calls...

nikol


Total Posts: 1456
Joined: Jun 2005
 
Posted: 2022-06-27 16:25
Selling very short options (puts and calls). Implied vol in this region is very questionable, so historic underlying info running backtesting are important. Book inventory I know and competitive prices I observe.

@silverside

Thank you for the pointer. Completely forgot about Rebonato.

... What is a man
If his chief good and market of his time
Be but to sleep and feed? (c)
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