Multivariate Option Pricing with Copulas

Umberto Cherubini and Elisa Luciano

ICER Working Papers - Applied Mathematics Series from ICER - International Centre for Economic Research

Abstract: In this paper we suggest the adoption of copula functions in order to price multivariate contingent claims. Copulas enable us to imbed the marginal distributions extracted from vertical spreads in the options markets in a multivariate pricing kernel. We prove that such kernel is a copula function, and that its super -replication strategy is represented by the Fréchet bounds. As applications, we provide prices for binary digital options, options on the minimum and options to exchange one asset for another. For each of these products, we provide no-arbitrage pricing bounds, as well as the values consistent with independence of the underlying assets. As a final reference value, we use a copula function calibrated on historical data.

Keywords: option pricing; basket options; copula functions; non-normal returns (search for similar items in EconPapers)
Pages: 26 pages
Date: 2002-01
New Economics Papers: this item is included in nep-fin and nep-rmg
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpmath:05-2002

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