Financial Engineering Workshop: Geneviéve Gauthier (HEC Montreal)

Geneviéve Gauthier is a professor in the Department of Decision Sciences at HEC Montréal. She will be giving a seminar titled "Price Bias and Common Practice in Option Pricing" on Wednesday 12th February 2020  in Bunhill Row, room 2005. (Refreshments will be available in the room from 17:40).

 

Price Bias and Common Practice in Option Pricing. Why Idiosyncratic Jump Risk Matters.

Geneviéve Gauthier, HEC Montreal

 

The talk will cover two important and related topics. The first part will discuss the use of semiclosed-form option pricing formula for complex financial models that depends on unobservable factors such as stochastic volatility and jump intensity. A popular practice is to use an estimate of these latent factors to compute the option price. However, in many situations, this plug-and-play approximation is found to be highly biased when only the history of the stock price is used to recover the latent states. This bias is corrected when option prices are added to the sample.

The second part of the talk will shed new light on the pricing of idiosyncratic risk by exploiting the richness of option data. We show that the contribution of idiosyncratic risk to the equity premium arises exclusively from jump risk. Tail risk thus plays a central role in the pricing of idiosyncratic risk.

Geneviéve Gauthier is a professor in the Department of Decision Sciences at HEC Montréal. With a background in statistics, probability and stochastic calculus, she teaches financial engineering to master and doctoral students. Her research interests include modelling, measurement and management of risks, derivatives pricing, and financial econometrics. She received in 2018 the SSC Award for Impact of Applied and Collaborative Work from the Statistical Society of Canada for her outstanding contributions to the promotion of innovative statistical methodologies in financial engineering, and in the training of highly qualified personnel. Some of her publications appeared in Review of Financial Studies, Energy Journal, Journal of Risk and insurance, Journal of banking and Finance, and European Journal of Operations Research.

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