Multivariate option pricing using copulae

The complexity of financial products significantly increased in the past ten 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 and it involves to model the dependency among the assets 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 needed for the pricing. The method is illustrated with US market data on basket options written on two or three international indices.     «

The complexity of financial products significantly increased in the past ten 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 and it involves to model the dependency among the assets using a copula based on pair-copula constructions. Unlike most previous studies on this topic, we do not assume that the depend...     »