A Model-Free Approach to Multivariate Option Pricing

28 Pages Posted: 13 Nov 2019

See all articles by Carole Bernard

Carole Bernard

Grenoble Ecole de Management; Vrije Universiteit Brussel (VUB)

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: February 1, 2018

Abstract

We propose a novel model-free approach to extract a joint multivariate distribution, which is consistent with options written on individual stocks as well as on various available indices. To do so, we first use the market prices of traded options to infer the risk-neutral marginal distributions for the stocks and the linear combinations given by the indices and then apply a new combinatorial algorithm to find a compatible joint distribution. Armed with the joint distribution, we can price general path-independent multivariate options.

Keywords: Multivariate Option Pricing, Rearrangement Algorithm, Risk-Neutral Joint Distribution, Option-Implied Dependence, Entropy, Model Uncertainty

Suggested Citation

Bernard, Carole and Bondarenko, Oleg and Vanduffel, Steven, A Model-Free Approach to Multivariate Option Pricing (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=3478924 or http://dx.doi.org/10.2139/ssrn.3478924

Carole Bernard

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

Steven Vanduffel (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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