Economy – Quantitative Finance – Pricing of Securities
Scientific paper
2011-10-21
Economy
Quantitative Finance
Pricing of Securities
22 pages, 3 figures
Scientific paper
In this paper we present a new multi-asset pricing model, which is built upon newly developed families of solvable multi-parameter single-asset diffusions with a nonlinear smile-shaped volatility and an affine drift. Our multi-asset pricing model arises by employing copula methods. In particular, all discounted single-asset price processes are modeled as martingale diffusions under a risk-neutral measure. The price processes are so-called UOU diffusions and they are each generated by combining a variable (Ito) transformation with a measure change performed on an underlying Ornstein-Uhlenbeck (Gaussian) process. Consequently, we exploit the use of a normal bridge copula for coupling the single-asset dynamics while reducing the distribution of the multi-asset price process to a multivariate normal distribution. Such an approach allows us to simulate multidimensional price paths in a precise and fast manner and hence to price path-dependent financial derivatives such as Asian-style and Bermudan options using the Monte Carlo method. We also demonstrate how to successfully calibrate our multi-asset pricing model by fitting respective equity option and asset market prices to the single-asset models and their return correlations (i.e. the copula function) using the least-square and maximum-likelihood estimation methods.
Campolieti Giuseppe
Makarov Roman N.
Vasiliev Andrey
No associations
LandOfFree
Bridge Copula Model for Option Pricing does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Bridge Copula Model for Option Pricing, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Bridge Copula Model for Option Pricing will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-84669