Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market

Dominique Guegan and Jing Zhang
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Dominique Guegan: Centre d'Economie de la Sorbonne
Jing Zhang: East China Normal University et Centre d'Economie de la Sorbonne

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: This paper develops the method for pricing bivariate contingent claims under General Autoregressive Conditionally Heteroskedastic (GARCH) process. In order to provide a general framework being able to accommodate skewness, leptokurtosis, fat tails as well as the time varying volatility that are often found in financial data, generalized hyperbolic (GH) distribution is used for innovations. As the association between the underlying assets may vary over time, the dynamic copula approach is considered. Therefore, the proposed method proves to play an important role in pricing bivariate option. The approach is illustrated for Chinese market with one type of better-of-two-markets claims: call option on the better performer of Shanghai Stock Composite Index and Shenzhen Stock Composite Index. Results show that the option prices obtained by the GARCH-GH model with time-varying copula differ substantially from the prices implied by the GARCH-Gaussian dynamic copula model. Moreover, the empirical work displays the advantage of the suggested method

Keywords: Call-on-max option; GARCH process; generalized hyperbolic (GH) distribution; normal inverse Gaussian (NIG) distribution; copula; dynamic copula (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-11
New Economics Papers: this item is included in nep-ets and nep-fmk
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Citations: View citations in EconPapers (1)

Published in European Journal of Finance, 15, (7-8), 2009, pp.777-795

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Related works:
Journal Article: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market (2009)
Working Paper: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market (2009)
Working Paper: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market (2007)
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