@inproceedings{6c22611064594892998979f2779d599c,

title = "Basket option pricing and implied correlation in a one-factor L{\'e}vy model",

abstract = "In this paper we employ a one-factor L{\'e}vy model to determine basket option prices. More precisely, basket option prices are determined by replacing the distribution of the real basketwith an appropriate approximation. For the approximate basket we determine the underlying characteristic function and hence we can derive the related basket option prices by using the Carr–Madan formula. We consider a three-moments-matching method. Numerical examples illustrate the accuracy of our approximations; several L{\'e}vy models are calibrated to market data and basket option prices are determined. In the last part we show how our newly designed basket option pricing formula can be used to define implied L{\'e}vy correlation by matching model and market prices for basket options. Our main finding is that the implied L{\'e}vy correlation smile is flatter than its Gaussian counterpart. Furthermore, if (near) atthe- money option prices are used, the corresponding implied Gaussian correlation estimate is a good proxy for the implied L{\'e}vy correlation.",

keywords = "Basket option, Implied correlation, One-factor L{\'e}vy model, Variance-Gamma",

author = "Dani{\"e}l Linders and Wim Schoutens",

note = "Publisher Copyright: {\textcopyright} The Author(s) 2016.; Conference on Innovations in Derivatives Markets—Fixed income modeling, valuation adjustments, risk management, and regulation, 2015 ; Conference date: 30-03-2015 Through 01-04-2015",

year = "2016",

doi = "10.1007/978-3-319-33446-2_16",

language = "English (US)",

isbn = "9783319334455",

series = "Springer Proceedings in Mathematics and Statistics",

publisher = "Springer",

pages = "335--367",

editor = "Zorana Grbac and Kathrin Glau and Matthias Scherer and Zagst Zagst",

booktitle = "Innovations in Derivatives Markets - Fixed Income Modeling, Valuation Adjustments, Risk Management, and Regulation",

address = "Germany",

}