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On the application of Wishart process to the pricing of equity derivatives: the multi-asset case

Gaetano Bua () and Daniele Marazzina ()
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Gaetano Bua: Politecnico di Milano
Daniele Marazzina: Politecnico di Milano

Computational Management Science, 2021, vol. 18, issue 2, No 2, 149-176

Abstract: Abstract Given the inherent complexity of financial markets, a wide area of research in the field of mathematical finance is devoted to develop accurate models for the pricing of contingent claims. Focusing on the stochastic volatility approach (i.e. we assume to describe asset volatility as an additional stochastic process), it appears desirable to introduce reliable dynamics in order to take into account the presence of several assets involved in the definition of multi-asset payoffs. In this article we deal with the multi asset Wishart Affine Stochastic Correlation model, that makes use of Wishart process to describe the stochastic variance covariance matrix of assets return. The resulting parametrization turns out to be a genuine multi-asset extension of the Heston model: each asset is exactly described by a single instance of the Heston dynamics while the joint behaviour is enriched by cross-assets and cross-variances stochastic correlation, all wrapped in an affine modeling. In this framework, we propose a fast and accurate calibration procedure, and two Monte Carlo simulation schemes.

Keywords: Wishart process; Calibration; Monte Carlo; Multi assets (search for similar items in EconPapers)
JEL-codes: C02 C63 G12 G13 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10287-021-00388-7

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