Multivariate option pricing using copulae

Carole Bernard, Claudia Czado

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)509-526
Number of pages18
JournalApplied Stochastic Models in Business and Industry
Volume29
Issue number5
DOIs
StatePublished - Sep 2013

Keywords

  • basket options
  • multivariate derivatives
  • pair-copula construction
  • pricing

Fingerprint

Dive into the research topics of 'Multivariate option pricing using copulae'. Together they form a unique fingerprint.

Cite this