Cutting Edge introduction: Hedging dependence

Hedging dependence

Much has been said about how pre-crisis quantitative methods neglected the way price movements for different assets can depend on each other – most infamously so, the Gaussian copula, the simplifying assumptions of which failed so drastically that nonsensical correlation values of more than 100% were required to calibrate to market prices. One of the lessons was that correlation is not everything when it comes to how price movements interrelate – joint distributions in general nee