Pricing of basket options using univariate normal inverse gaussian approximations
AbstractIn this paper we study the approximation of a sum of assets having marginal log-returns being multivariate normal inverse Gaussian distributed. We analyse the choice of a univariate exponential NIG distribution, where the approximation is based on matching of moments. Probability densities and European basket call option prices of the two‐asset and univariate approximations are studied and analysed in two cases, each case consisting of nine scenarios of different volatilities and correlations, to assess the accuracy of the approximation. We find that the sum can be well approximated, failing, however, to match the tails for some extreme parameter choices. The approximated option prices are close to the true ones, although becoming significantly underestimated for far out‐of‐the‐money call options. Copyright (C) 2010 John Wiley & Sons, Ltd.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.
Volume (Year): 30 (2011)
Issue (Month): 3 (April)
Contact details of provider:
Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966
normal inverse Gaussian distribution ; approximation ; moment matching ; basket option ; simulation ;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.