Correlation Risk Premia for Multi-Asset Equity Options
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.
|Date of creation:||2003|
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- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
- Turan G. Bali & Hans Genberg & Salih N. Neftci, 2002. "Excessive variation in risk‐factor correlations and volatilities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(12), pages 1119-1146, December.
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- Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 277-283, September.
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