PRICING TWO-ASSET BARRIER OPTIONS UNDER STOCHASTIC CORRELATION VIA PERTURBATION

Marcos Escobar Anel (), Barbara Götz (), Daniela Neykova () and Rudi Zagst ()
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Barbara Götz: Technische Universität München, München, Parking 11, 85748 Garching-Hochbrück, Germany
Daniela Neykova: Technische Universität München, München, Parking 11, 85748 Garching-Hochbrück, Germany
Rudi Zagst: Chair of Mathematical Finance, Technische Universität München, München, Parking 11, 85748 Garching-Hochbrück, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 03, 1-44

Abstract: The correlation structure is crucial when pricing multi-asset products, in particular barrier options. In this work, we price two-asset path-dependent derivatives by means of perturbation theory in the context of a bi-dimensional asset model with stochastic correlation and volatilities. To our best knowledge, this is the first attempt at pricing barriers with stochastic correlation. It turns out that the leading term of the approximation corresponds to a constant covariance Black–Scholes type price with correction terms adjusting for stochastic volatility and stochastic correlation effects. The practicability of the presented method is illustrated by some numerical implementations.

Keywords: Multivariate asset price model; stochastic correlation; perturbation theory; barrier derivatives pricing (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024915500181

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