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Pricing multivariate barrier reverse convertibles with factor-based subordinators

Marina Marena, Andrea Romeo and Patrizia Semeraro

No 439, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: In this paper we study factor-based subordinated Lévy processes in their VG and NIG specifications, and focus on their ability to price multivariate exotic derivatives. Different model specifications, calibrated to a dataset of multivariate Barrier Reverse Convertibles listed at the Swiss market, show diverse ability in capturing smile patterns and recovering empirical correlations. We show how the range of the correlation spanned by the model is linked to the process marginal distributions. Our analysis finds that there exists a trade-off between marginal and correlation fit. A sensitivity analysis is performed, showing how the product's characteristics and the model's features affect Multi Barrier Reverse Convertible prices. Market and model prices are analyzed, highlighting and explaining discrepancies.

Keywords: Lévy processes; multivariate subordinators; multivariate asset modelling; multivariate variance gamma process; multivariate normal inverse Gaussian process; multi barrier reverse convertibles. (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2015
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