Joshua Rosenberg
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.
Subject: Investment/Derivatives, Investments/Econometrics, International Finance (Empirical, theoretical)
Rosenberg: (212) 998-0311 jrosenb0@stern.nyu.edu http://www.stern.nyu.edu/~jrosenb0
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