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| Author: | Rosenberg, J. V. |
| Title: | Pricing multivariate contingent claims using estimated risk-neutral density functions. |
| Journal: | Journal of International Money and Finance
1998 : APR, VOL. 17:2, p. 229-247 |
| Index terms: | ASSET VALUATION STOCHASTIC PROCESSES MULTIVARIATE ANALYSIS |
| Language: | eng |
| Abstract: | Many asset price series exhibit time-varying volatility, jumps and other features inconsistent with assumptions about the undelying price process made by standard multivariate contingent claims (MVCC) pricing models. This article 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. The flexible NLS pricing technique is used to value several bivariate contingent claims dependent on foreign exchange rates in 1993 and 1994. The biavariate flexible risk-neutral density function more accurately prices existing options than the bivariate log-normal denesity implied by a multivariate geometric Brownian motion. |
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