Deconstructing correlation

To properly value a basket option, one should construct a joint probability density, correctly repricing all asset smiles and correlation smiles. At first sight the task seems formidable, but by reformulating the problem, Peter Austing develops a model that is simple and fast, admitting analytic or semi-analytic valuation

correlation

When markets are stressed, assets become more strongly correlated. Just as there is an implied volatility smile, there is also a correlation smile. However, though it is known to exist, the correlation smile has been largely ignored in multi-asset derivatives pricing for reasons of practicality: there may not be liquid instruments to determine the smile, and even if it is known, practical pricing algorithms taking account of the smile may not exist.

CLICK HERE TO VIEW THE PDF

The former can be

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here