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Dynamic Lévy Copulas and their Applications in the Pricing of Multidimensional Option with Path Dependence

Author

Listed:
  • Edson Bastos e Santos

    (FEA/USP)

  • Nelson Ithiro Tanaka

    (Instituto de Matemática e Estatística da USP)

Abstract

This article presents an alternative to modeling multidimensional options, where the payoffs depend on the paths of the trajectories of the underlying-asset prices. The proposed technique considers Lévy processes, a very ample class of stochastic processes that allows the existence of jumps (discontinuities) in the price process of financial assets, and as a particular case, comprises the Brownian motion. To describe the dependence among Lévy processes, extending the static concepts of the ordinary copulas to the Lévy processes context, considering the Lévy measure, which characterizes the jumps behavior of these processes. A comparison between the Clayton and the Frank dynamic copulas and their impact in asset pricing of Asian type derivatives contracts is studied, considering gamma processes and Monte Carlo simulation procedures.

Suggested Citation

  • Edson Bastos e Santos & Nelson Ithiro Tanaka, 2008. "Dynamic Lévy Copulas and their Applications in the Pricing of Multidimensional Option with Path Dependence," Brazilian Review of Finance, Brazilian Society of Finance, vol. 6(1), pages 69-111.
    • Handle: RePEc:brf:journl:v:6:y:2008:i:1:p:69-111
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    More about this item

    Keywords

    Lévy processes; dynamic copulas; multidimensional options; path-dependent; ; Lévy processes; dynamic copulas; multidimensional options; path-dependent;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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