Pricing the correlation skew with normal mean-variance mixture copulas

Abstract

In this paper we propose a new pricing methodology for European multi-asset options based on the family of normal mean-variance mixture copulas. The goal is to develop a copula-based method with the flexibility to reproduce the correlation skew, and at the same time efficient enough to be used for large baskets. Simplicity and ease of implementation are also properties of the model. After presenting the relevant pricing formulae, the methodology is applied to several market problems where the correlation skew is involved in different ways.