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Multivariate option pricing with time varying volatility and correlations

  • Rombouts, Jeroen V.K.
  • Stentoft, Lars

In this paper we consider option pricing using multivariate models for asset returns. Specifically, we demonstrate the existence of an equivalent martingale measure, we characterize the risk neutral dynamics, and we provide a feasible way for pricing options in this framework. Our application confirms the importance of allowing for dynamic correlation, and it shows that accommodating correlation risk and modeling non-Gaussian features with multivariate mixtures of normals substantially changes the estimated option prices.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 2267-2281

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2267-2281
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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