Publication: Pricing Path Dependent Options under New Multivariate Nonlinear Diffusion Models

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Title	Pricing Path Dependent Options under New Multivariate Nonlinear Diffusion Models
Authors/Editors*	Campolieti G., Makarov R., and Lai Y.
Where published*	Proceedings of MCQMC2006
How published*	Journal
Year*	2006
Volume	-1
Number	-1
Pages
Publisher
Keywords
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Abstract	In this paper we present two new multivariate nonlinear diffusion models for valuing financial derivatives. These models are built upon a newly developed univariate forward price model UOU, which is in turn constructed from an underlying Ornstein-Uhlenbeck diffusion process by transforming variables and changing measure. In addition to its exceptional probabilistic and finance-related properties, the UOU model admits analytically closed-form transition density functions. To couple independent UOU processes, we employ a bridge copula method or a multivariate Ornstein-Uhlenbeck process. The models constructed hereare used to price Asian-style path-dependent and Bermudan options.