We propose a methodology to measure the parameter estimation risk and model specification risk of pricing models, as well as model selection risk of model classes, based on realized payoffs, for products in the over-the-counter market. Lévy jump models and affine jump-diffusion models are...

Different theoretical and numerical methods for calculating the fair-value of a variance swap give rise to systematic biases that are most pronounced during volatile periods. For instance, differences of 10-20 percentage points would have been observed on fair-value index variance swap rates...