Correlations in asynchronous markets
Lorenzo Bergomi addresses the issue of pricing multi-asset options in the context of asynchronous markets. Using the criterion that the carry profit and loss (P&L) vanishes, he derives the expression of the correlation estimator for the asynchronous case. He studies its historical behaviour for the case of the Stoxx 50, S&P 500 and Nikkei indexes, and compares his estimator with popular heuristic estimators. Finally, he characterises practical situations whereby correlations larger than one are materialised as a P&L
Multi-asset options have long been prominent among equity derivatives. The number of securities referenced in an equity payout may range from a few – in the case of, say, a basket option on indexes – to 50 for the case of a correlation swap on the components of the Stoxx 50 index. In addition, option payouts are generally written on baskets of securities that span all geographical areas.
Correlations in asynchronous markets
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