Imperial College London
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ProfessorDamianoBrigo

Faculty of Natural Sciences, Department of Mathematics

Chair in Mathematical Finance
 
 
 
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Contact

 

damiano.brigo CV

 
 
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Location

 

805Weeks BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Brigo:2017:10.1080/24725854.2017.1374581,
author = {Brigo, D and Rapisarda, F and Sridi, A},
doi = {10.1080/24725854.2017.1374581},
journal = {IISE Transactions},
pages = {27--44},
title = {The multivariate mixture dynamics: consistent no-arbitrage single-asset and index volatility smiles},
url = {http://dx.doi.org/10.1080/24725854.2017.1374581},
volume = {50},
year = {2017}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - We introduce a new arbitrage-free multivariate dynamic asset pricing model that allows us to reconcile single name and index/basket volatility smiles using a tractable and explicit dependence structure that goes beyond instantaneous correlation. Each asset volatility smile is modeled according to a density-mixture dynamical model while the same property holds for the multivariate process of all assets, whose density is a mixture of multivariate basic densities. After introducing the model, we derive tractable index option smile formulas resulting from the model and related closed form solutions for multivariate densities taking the form of multivariate mixtures. Using Markovian projection techniques, we relate our model to a multivariate uncertain volatility model and show a consistency result with geometric baskets with hints on possible uses in investigating triangular relationships between foreign exchange rates and the related smiles in practice. We also derive closed form solutions for a number of terminal statistics of dependence, and derive a precise relationship with a simpler but less tractable model based on a basic instantaneous correlation structure. Finally, closed form solutions for volatility/assets correlations illuminating the relationship with the uncertain volatility model are introduced. The model tractability makes it particularly suited for calibration and risk management applications, where speed of calculations and tractability are essential. A few numerical examples on basket and spread options pricing conclude the paper.
AU  - Brigo,D
AU  - Rapisarda,F
AU  - Sridi,A
DO  - 10.1080/24725854.2017.1374581
EP  - 44
PY  - 2017///
SN  - 0740-817X
SP  - 27
TI  - The multivariate mixture dynamics: consistent no-arbitrage single-asset and index volatility smiles
T2  - IISE Transactions
UR  - http://dx.doi.org/10.1080/24725854.2017.1374581
UR  - http://hdl.handle.net/10044/1/50388
VL  - 50
ER  -
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