Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market

Dominique Guegan () and Jing Zhang ()
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Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Jing Zhang: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ECNU - East China Normal University [Shangaï]

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: This paper develops the method for pricing bivariate contingent claims under General Autoregressive Conditionally Heteroskedastic (GARCH) process. In order to provide a general framework being able to accommodate skewness, leptokurtosis, fat tails as well as the time varying volatility that are often found in financial data, generalized hyperbolic (GH) distribution is used for innovations. As the association between the underlying assets may vary over time, the dynamic copula approach is considered. Therefore, the proposed method proves to play an important role in pricing bivariate option. The approach is illustrated for Chinese market with one type of better-of-two-markets claims : call option on the better performer of Shanghai Stock Composite Index and Shenzhen Stock Composite Index. Results show that the option prices obtained by the GARCH-GH model with time-varying copula differ substantially from the prices implied by the GARCH-Gaussian dynamic copula model. Moreover, the empirical work displays the advantage of the suggested method.

Keywords: Call-on-max option; GARCH process; generalized hyperbolic (GH) distribution; normal inverse Gaussian (NIG) distribution; copula; dynamic copula (search for similar items in EconPapers)
Date: 2009-10
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00368336v1
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Citations: View citations in EconPapers (10)

Published in European Journal of Finance, 2009, 15 (7-8), pp.777-795. ⟨10.1080/13518470902895344⟩

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Related works:
Working Paper: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market (2007)
Working Paper: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00368336

DOI: 10.1080/13518470902895344

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