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A note on the pricing of multivariate contingent claims under a transformed-gamma distribution

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Listed:
  • Luiz Vitiello
  • Ivonia Rebelo

Abstract

We develop a framework for pricing multivariate European-style contingent claims in a discrete-time economy based on a multivariate transformed-gamma distribution. In our model, each transformed-gamma distributed underlying asset depends on two terms: a idiosyncratic term and a systematic term, where the latter is the same for all underlying assets and has a direct impact on their correlation structure. Given our distributional assumptions and the existence of a representative agent with a standard utility function, we apply equilibrium arguments and provide sufficient conditions for obtaining preference-free contingent claim pricing equations. We illustrate the applicability of our framework by providing examples of preference-free contingent claim pricing models. Multivariate pricing models are of particular interest when payoffs depend on two or more underlying assets, such as crack and crush spread options, options to exchange one asset for another, and options with a stochastic strike price in general. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Luiz Vitiello & Ivonia Rebelo, 2015. "A note on the pricing of multivariate contingent claims under a transformed-gamma distribution," Review of Derivatives Research, Springer, vol. 18(3), pages 291-300, October.
    • Handle: RePEc:kap:revdev:v:18:y:2015:i:3:p:291-300
    DOI: 10.1007/s11147-015-9112-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Multivariate transformed-gamma distribution; Multivariate contingent claim; Stochastic strike price; General equilibrium; G13;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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