On the Application of Wishart Process to the Pricing of Equity Derivatives: The Multi-Asset Case

30 Pages Posted: 17 Oct 2019

See all articles by Gaetano La Bua

Gaetano La Bua

Polytechnic University of Milan - Department of Mathematics

Daniele Marazzina

Polytechnic University of Milan - Department of Mathematics

Date Written: October 8, 2019

Abstract

Given the inherent complexity of financial markets, a wide area of research in the field of mathematical finance is devoted to develop accurate models for the pricing of contingent claims. Focusing on the stochastic volatility approach (i.e. we assume to describe asset volatility as an additional stochastic process), it appears desirable to introduce reliable dynamics in order to take into account the presence of several assets involved in the definition of multi-asset payoffs. In this article we deal with the multi asset Wishart Affine Stochastic Correlation model, that makes use of Wishart process to describe the stochastic variance covariance matrix of assets return. The resulting parametrization turns out to be a genuine multi-asset extension of the Heston model: each asset is exactly described by a single instance of the Heston dynamics while the joint behaviour is enriched by cross-assets and cross-variances stochastic correlation, all wrapped in an affine modeling. In this framework, we propose a fast and accurate calibration procedure, and two Monte Carlo simulation schemes.

Keywords: Wishart process, Calibration, Monte Carlo, Multi Assets

JEL Classification: C02, C63, G12, G13

Suggested Citation

La Bua, Gaetano and Marazzina, Daniele, On the Application of Wishart Process to the Pricing of Equity Derivatives: The Multi-Asset Case (October 8, 2019). Available at SSRN: https://ssrn.com/abstract=3466259 or http://dx.doi.org/10.2139/ssrn.3466259

Gaetano La Bua

Polytechnic University of Milan - Department of Mathematics ( email )

Via Bonardi, 9
Milano, MI 20133
Italy

Daniele Marazzina (Contact Author)

Polytechnic University of Milan - Department of Mathematics ( email )

Via Bonardi, 9
Milano, MI 20133
Italy

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