Pricing bivariate option under GARCH processes with time-varying copula
AbstractThis paper develops a method for pricing bivariate contingent claims under General Autoregressive Conditionally Heteroskedastic (GARCH) process. As the association between the underlying assets may vary over time, the dynamic copula with time-varying parameter offers a better alternative to any static model for dependence structure and even to the dynamic copula model determined by dynamic dependence measure. Therefore, the proposed method proves to play an important role in pricing bivariate options. The approach is illustrated with one type of better-of-two-markets claims : call option on the better performer of Shanghai and Shenzhen stock composite indexes. Results show that the option prices obtained by the time-varying copula model differ substantially from the prices implied by the static copula model and even the dynamic copula model derived from the dynamic dependence measure. Moreover, the empirical work displays the advantages of the suggested method.
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 InfoPaper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00259242.
Date of creation: Feb 2008
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00259242
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Call-on-max option; GARCH process; Kendall's tau; Copula; Dynamic Copula; time-varying parameter.;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Jeroen V.K. Rombouts & Lars Stentoft, 2010.
"Multivariate Option Pricing with Time Varying Volatility and Correlations,"
Cahiers de recherche
- Rombouts, Jeroen V.K. & Stentoft, Lars, 2011. "Multivariate option pricing with time varying volatility and correlations," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2267-2281, September.
- Jeroen Rombouts & Lars Peter Stentoft, 2010. "Multivariate Option Pricing With Time Varying Volatility and Correlations," CIRANO Working Papers 2010s-23, CIRANO.
- ROMBOUTS, Jeroen J. K & STENTOFT, Lars, 2010. "Multivariate option pricing with time varying volatility and correlations," CORE Discussion Papers 2010020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Jeroen V.K. Rombouts & Lars Stentoft, 2010. "Multivariate Option Pricing with Time Varying Volatility and Correlations," CREATES Research Papers 2010-19, School of Economics and Management, University of Aarhus.
- Branger, Nicole & Muck, Matthias, 2012. "Keep on smiling? The pricing of Quanto options when all covariances are stochastic," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1577-1591.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.