Breaking correlation breaks

Large deviations in dependencies – correlation breaks – are a hazard when risk managing multi-asset derivatives such as worst-of options. Adil Reghai presents a calibration scheme for local correlation that ensures a basket’s skew is compatible with the local volatility dynamics of its constituents – and leads to more accurate hedging

Local correlation has been thoroughly studied in physics in order, for instance, to describe interactions between electrons. In financial mathematics, most research on correlation comes from the credit derivatives industry, such as deriving joint-default distributions consistent with the correlation skews observed on collateralised debt obligation tranches quotes thanks to local Gaussian copulas (Burtschell, Gregory & Laurent, 2005). In equity derivatives, Avellaneda et al (2002) approximated

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What gold's rise means for rates, equities

It has been several years since we have seen volatility in gold. An increase in gold volatility can typically be associated with a change in sentiment and investor behavior. The precious metal has surged this year on increased demand for safe haven…

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