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Pricing multivariate barrier reverse convertibles with factor-based subordinators

Author

Listed:
  • Marina Marena
  • Andrea Romeo
  • Patrizia Semeraro

Abstract

In this paper we study factor-based subordinated Lévy processes in their VG and NIG specifications, and focus on their ability to price multivariate exotic derivatives. Different model specifications, calibrated to a dataset of multivariate Barrier Reverse Convertibles listed at the Swiss market, show diverse ability in capturing smile patterns and recovering empirical correlations. We show how the range of the correlation spanned by the model is linked to the process marginal distributions. Our analysis finds that there exists a trade-off between marginal and correlation fit. A sensitivity analysis is performed, showing how the product's characteristics and the model's features affect Multi Barrier Reverse Convertible prices. Market and model prices are analyzed, highlighting and explaining discrepancies.

Suggested Citation

  • Marina Marena & Andrea Romeo & Patrizia Semeraro, 2015. "Pricing multivariate barrier reverse convertibles with factor-based subordinators," Carlo Alberto Notebooks 439, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:439
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    File URL: http://www.carloalberto.org/assets/working-papers/no.439.pdf
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    References listed on IDEAS

    as
    1. Elisa Luciano & Wim Schoutens, 2006. "A multivariate jump-driven financial asset model," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 385-402.
    2. Martin Wallmeier & Martin Diethelm, 2012. "Multivariate downside risk: Normal versus Variance Gamma," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(5), pages 431-458, May.
    3. Elisa Luciano & Marina Marena & Patrizia Semeraro, 2013. "Dependence Calibration and Portfolio Fit with FactorBased Time Changes," Carlo Alberto Notebooks 307, Collegio Carlo Alberto, revised 2015.
    4. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-524, October.
    5. Patrizia Semeraro, 2006. "A Multivariate Time-Changed Lévy Model for Financial Applications," ICER Working Papers - Applied Mathematics Series 10-2006, ICER - International Centre for Economic Research.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Lévy processes; multivariate subordinators; multivariate asset modelling; multivariate variance gamma process; multivariate normal inverse Gaussian process; multi barrier reverse convertibles.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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