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Multivariate asset price dynamics with stochastic covariation

Author

Listed:
  • Julian Williams
  • Christos Ioannidis

Abstract

Stochastic volatility models such as those of Heston [Rev. Financial Stud., 1993, 6(2), 327-343] and Hull and White [J. Finance, 1987, 42(2), 281-300] are often used to model volatility risk in the pricing and hedging of contingent claims on risky assets. Recent empirical evidence has shown that these models under general specifications often do not fully capture the volatility dynamics observed in situ. This paper provides an analytical demonstration of the consequences of multivariate stochastic covariation on the pricing of contingent claims and suggests a hedging strategy for full delta neutrality.

Suggested Citation

  • Julian Williams & Christos Ioannidis, 2011. "Multivariate asset price dynamics with stochastic covariation," Quantitative Finance, Taylor & Francis Journals, vol. 11(1), pages 125-134.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:1:p:125-134
    DOI: 10.1080/14697680903419693
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    Cited by:

    1. Giovanni Calice & Christos Ioannidis & Julian Williams, 2012. "Credit Derivatives and the Default Risk of Large Complex Financial Institutions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 85-107, October.
    2. Mike Buckle & Jing Chen & Julian Williams, 2014. "How Predictable Are Equity Covariance Matrices? Evidence from High‐Frequency Data for Four Markets," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(7), pages 542-557, November.

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