Multivariate option pricing with time varying volatility and correlations

Jeroen Rombouts and Lars Stentoft

Journal of Banking & Finance, 2011, vol. 35, issue 9, 2267-2281

Abstract: In this paper we consider option pricing using multivariate models for asset returns. Specifically, we demonstrate the existence of an equivalent martingale measure, we characterize the risk neutral dynamics, and we provide a feasible way for pricing options in this framework. Our application confirms the importance of allowing for dynamic correlation, and it shows that accommodating correlation risk and modeling non-Gaussian features with multivariate mixtures of normals substantially changes the estimated option prices.

Keywords: Multivariate; risk; premia; Option; pricing; GARCH; models (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Multivariate Option Pricing with Time Varying Volatility and Correlations (2010)
Working Paper: Multivariate Option Pricing With Time Varying Volatility and Correlations (2010)
Working Paper: Multivariate option pricing with time varying volatility and correlations (2010)
Working Paper: Multivariate Option Pricing with Time Varying Volatility and Correlations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:9:p:2267-2281

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