Pricing the correlation skew with normal mean–variance mixture copulas

Ignacio Luján Fernández

Journal of Computational Finance

Abstract: In this paper we propose a new pricing methodology for European-style multi-asset derivatives based on a family of normal mean–variance mixture copulas. The goal is to develop a copula-based method that is flexible enough to reproduce correlation skew and efficient enough to be used for large baskets. Simplicity and ease of implementation are also desirable properties. After presenting the relevant pricing formulas, the methodology is then applied to several market problems where there are different forms of correlation skew.

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