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Computing the Volume of n-Dimensional Copulas

  • Umberto Cherubini
  • Silvia Romagnoli
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    A problem that is very relevant in applications of copula functions to finance is the computation of the survival copula, which is applied to enforce multivariate put-call parity. This may be very complex for large dimensions. The problem is a special case of the more general problem of volume computation in high-dimensional copulas. We provide an algorithm for the exact computation of the volume of copula functions in cases where the copula function is computable in closed form. We apply the algorithm to the problem of computing the survival of a copula function in the pricing problem of a multivariate digital option, and we provide evidence that this is feasible for baskets of up to 20 underlying assets, with acceptable CPU time performance.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860802597311
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    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 4 ()
    Pages: 307-314

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    Handle: RePEc:taf:apmtfi:v:16:y:2009:i:4:p:307-314
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