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Options on portfolios with higher-order moments

Author

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  • Bhandari, Rishabh
  • Das, Sanjiv R.

Abstract

We develop a simple calibration approach to generate return distributions for multivariate asset distributions and use this technique to price options on portfolios given the first four co-moments of the joint distribution of returns. The technique is fast and captures the impact of covariance, and the co-skewness and co-kurtosis tensors on the value of these options. Given the technique works for a portfolio, the same is also applicable to options on individual securities as a special simpler case.

Suggested Citation

  • Bhandari, Rishabh & Das, Sanjiv R., 2009. "Options on portfolios with higher-order moments," Finance Research Letters, Elsevier, vol. 6(3), pages 122-129, September.
    • Handle: RePEc:eee:finlet:v:6:y:2009:i:3:p:122-129
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    References listed on IDEAS

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    1. Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999. "Of Smiles and Smirks: A Term Structure Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(2), pages 211-239, June.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    3. Robert JARROW & Andrew RUDD, 2008. "Approximate Option Valuation For Arbitrary Stochastic Processes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 1, pages 9-31, World Scientific Publishing Co. Pte. Ltd..
    4. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    5. Edward Frees & Emiliano Valdez, 1998. "Understanding Relationships Using Copulas," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(1), pages 1-25.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Rubinstein, Mark, 1994. "Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    8. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
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    Cited by:

    1. Arismendi, Juan & Genaro, Alan De, 2016. "A Monte Carlo multi-asset option pricing approximation for general stochastic processes," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 75-99.
    2. Härdle, Wolfgang Karl & Nasekin, Sergey & Lee, David Kuo Chuen & Fai, Phoon Kok, 2014. "TEDAS - Tail Event Driven ASset Allocation," SFB 649 Discussion Papers 2014-032, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Juan Arismendi, 2014. "A Multi-Asset Option Approximation for General Stochastic Processes," ICMA Centre Discussion Papers in Finance icma-dp2014-03, Henley Business School, University of Reading.
    4. repec:hum:wpaper:sfb649dp2014-032 is not listed on IDEAS

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