Pricing multiasset equity options: How relevant is the dependence function?
AbstractIn this paper we test how different choices for the dependence function can affect the prices of a set of multiasset equity options. We conduct the analysis for various 5-dimensional baskets of UK shares, and a wide range of payoffs for the multiasset options, consistent with the instruments traded on the market. We also test the relevance of the dependence specification over both volatile and quiet market scenarios. Interestingly, we find that, in most circumstances, the choice of a dependence structure richer than the standard linear correlation does not seem to affect option prices substantially. However, the dependence function becomes more relevant in particularly volatile market conditions.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 34 (2010)
Issue (Month): 4 (April)
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Web page: http://www.elsevier.com/locate/jbf
Multiasset equity options Copula functions Monte Carlo simulation Correlation;
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