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Improved Fréchet Bounds and Model-Free Pricing of Multi-Asset Options

Part of: Mathematical finance Distribution theory - Probability

Published online by Cambridge University Press:  14 July 2016

Peter Tankov
Peter Tankov*
Affiliation:
École Polytechnique
*
∗Postal address: Centre de Mathématiques Appliquées, École Polytechnique, 91128 Palaiseau, France. Email address: [email protected]
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Abstract

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Improved bounds on the copula of a bivariate random vector are computed when partial information is available, such as the values of the copula on a given subset of [0, 1]2, or the value of a functional of the copula, monotone with respect to the concordance order. These results are then used to compute model-free bounds on the prices of two-asset options which make use of extra information about the dependence structure, such as the price of another two-asset option.

Keywords

CopulaFréchet-Hoeffding boundconcordance orderbasket option

MSC classification

Secondary: 60E15: Inequalities; stochastic orderings 91G20: Derivative securities
Type
Research Article
Information
Journal of Applied Probability , Volume 48 , Issue 2 , June 2011 , pp. 389 - 403
Copyright
Copyright © Applied Probability Trust 2011 

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