Sato two-factor models for multivariate option pricing

Florence Guillaume

Journal of Computational Finance

Abstract: ABSTRACT This paper provides a multivariate Sato model for multivariate option pricing where the asset log-returns are expressed as Sato time-changed Brownian motions and where the time change is the weighted sum of a common and an idiosyncratic component. The main advantage of this model is that it allows us to replicate univariate option prices in both the strike and time-to-maturity dimensions. In particular, it is able to fit both the univariate option surfaces and the asset logreturn dependence structures with high precision for the period from June 2008 to October 2009 - a time frame that includes the credit crisis.

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