Why the implied correlation of dispersion has to be higher than the correlation swap strike
It may be accepted wisdom and proven fact, that the implied correlation that results from a dispersion trade does not equal the price of a correlation swap in the market, but AXA Investment Managers Saad Slaoui and Jerome Vierling examine the theory behind this fact...
If diversification is still the principal or main technique used to decrease the risk of an equity portfolio and improve its risk-return profile, many investors see induced correlation exposure as an extreme risk.
In fact, one of the empirical characteristics of the correlation is its strong increase in stressed markets, and this is why correlation exposure could be considered as a bad risk by portfolio managers.
Usually, banks manufacture equity structured products with embedded correlation
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