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Correlation Risk Premia for Multi-Asset Equity Options

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  • Fengler, Matthias R.
  • Schwendner, Peter

Abstract

The lack of a liquid market for implied correlations requires traders to estimate correlation matrices for pricing multi-asset equity options from historical data. To quantify the precision of these correlation estimates, we devise a block bootstrap procedure. The resulting bootstrap distributions are mapped on price distributions of three standard types of multi-asset options. ?Minimal? bid-ask spreads that reflect the risk from estimating the unknown correlations are quoted as quantiles of the price distributions. We discuss the influence of different market regimes and different payoff structures on the price distributions and on the the size of the resulting bid-ask spreads. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2003,10.

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Date of creation: 2003
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Handle: RePEc:zbw:sfb373:200310

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Keywords: Multi--Asset Options; Correlation Derivatives; Correlation Risk; Bid-Ask Spreads; Block Bootstrapping; Market Making; Equity Derivatives;

References

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  1. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, American Finance Association, vol. 33(1), pages 177-86, March.
  2. Fengler, Matthias R. & Herwartz, Helmut, 2001. "Multivariate volatility models," SFB 373 Discussion Papers 2001,74, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(03), pages 277-283, September.
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Cited by:
  1. Aydınlı, Gökhan & Härdle, Wolfgang Karl & Neuwirth, E., 2003. "Computational Statistics with Spreadsheets Towards Efficiency, Reproducibility and Security," SFB 373 Discussion Papers 2003,26, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

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