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Journal articles (2011), Journal of Banking and Finance, 35 (9), pp. 2267-2281

Multivariate Option Pricing with Time Varying Volatility and Correlations

Rombouts Jeroen , 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. Link to the article

ROMBOUTS, J. and STENTOFT, L. (2011). Multivariate Option Pricing with Time Varying Volatility and Correlations. Journal of Banking and Finance, 35(9), pp. 2267-2281.

Keywords : #Multivariate-risk-premia, #Option-pricing, #GARCH-models