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Multivariate option pricing using copulae
Author(s) -
Bernard Carole,
Czado Claudia
Publication year - 2012
Publication title -
applied stochastic models in business and industry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.413
H-Index - 40
eISSN - 1526-4025
pISSN - 1524-1904
DOI - 10.1002/asmb.1934
Subject(s) - copula (linguistics) , multivariate statistics , econometrics , exotic option , economics , valuation of options , autoregressive conditional heteroskedasticity , financial market , financial economics , computer science , mathematics , statistics , finance , volatility (finance)
The complexity of financial products significantly increased in the past 10 years. In this paper, we investigate the pricing of basket options and more generally of complex exotic contracts depending on multiple indices. Our approach assumes that the underlying assets evolve as dependent GARCH(1, 1) processes. The dependence among the assets is modeled using a copula based on pair‐copula constructions. Unlike most previous studies on this topic, we do not assume that the dependence observed between historical asset prices is similar to the dependence under the risk‐neutral probability. The method is illustrated with US market data on basket options written on two or three international indices. Copyright © 2012 John Wiley & Sons, Ltd.