Title: Correlation Risk in Multiasset Equity Options Pricing
Citation: Annuario della Ricerca vol. 4 p. 1-27
Publisher: Newfin, Università Bocconi
Publication Year: 2006
JRC N°: JRC37109
URI: http://publications.jrc.ec.europa.eu/repository/handle/JRC37109
Type: Articles in periodicals and books
Abstract: Evaluating any equity opion with multiple underlying assets requires to estimate correlation coefficients among asset returns. Despite recent develpment of copula techniques, in fact, pricing is largely based on simpler techniques assuming multivariate normal returns and relying on historical correltation inputs. We show that the potential impact on estimated fair price of choices about sample size and return data frequency when estiamting historical correlations may be huge, and suggest how correlation input rosk in option pricing could be controlled through what-if analyses and an "average correlation vega" by traders, risk managers and auditors concerned with IAS39-complaint fair value estimates.
JRC Directorate:Space, Security and Migration

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