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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27094
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| Title: | Pricing Multivariate Contingent Claims Using Estimated Risk-neutral
Density Functions |
| Authors: | Rosenberg, Joshua |
| Issue Date: | Jun-1997 |
| Series/Report no.: | FIN-96-036 |
| Abstract: | Many asset price series exhibit time-varying volatility, jumps, and
other features inconsistent with assumptions about the underlying price
process made by standard multivariate contingent claims (MVCC) pricing
models. This paper develops an interpolative technique for pricing MVCCs
– flexible NLS pricing – that involves the estimation of a
flexible multivariate risk-neutral density function implied by existing
asset prices. As an application, the flexible NLS pricing technique is
used to value several bivariate contingent claims dependent on foreign
exchange rates in 1993 and 1994. The bivariate flexible risk-neutral
density function more accurately prices existing options than the
bivariate lognormal density implied by a multivariate geometric Brownian
motion. In addition, the bivariate contingent claims analyzed have
substantially different prices using the two density functions
suggesting flexible NLS pricing may improve accuracy over standard methods. |
| URI: | http://hdl.handle.net/2451/27094 |
| Appears in Collections: | Finance Working Papers
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