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| Title: | | Nonparametric pricing of multivariate contingent claims  |
| Authors: | | Rosenberg, Joshua V. |
| Issue Date: | | 2003 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 162 |
| Abstract: | | In this paper, I derive and implement a nonparametric, arbitrage-free technique for multivariate contingent claim (MVCC) pricing. Using results from the method of copulas, I show that the multivariate risk-neutral density can be written as a product of marginal risk-neutral densities and a risk-neutral dependence function. I then develop a pricing technique using nonparametrically estimated marginal risk-neutral densities (based on options data) and a nonparametric dependence function (based on historical return data). By using nonparametric estimation, I avoid the pricing biases that result from incorrect parametric assumptions such as lognormality. I apply this technique to estimate the joint risk-neutral density of euro-dollar and yen-dollar returns. I compare the nonparametric risk-neutral density with density based on a lognormal dependence function and nonparametric marginals. The nonparametric euro-yen risk-neutral density has greater volatility, skewness, and kurtosis than the density based on a lognormal dependence function. In a comparison of pricing accuracy for euro-yen futures options, I find that the nonparametric model is superior to the lognormal model. |
| JEL: | | C13 G14 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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