Correlation skew via stochastic correlation and jumps

Valer Zetocha introduces a correlation model based on the Jacobi process with jumps


Multi-asset equity derivatives are always very popular alternatives to single-stock ones for the extra squeeze in price that they bring, as, generally speaking, the multiasset options are cheaper. The hunt for a high payoff while maintaining a low price always places the typical clients (be they institutional, retail or private banking) on the same side of the trade; they buy the correlation and the banks sell it. This standard positioning then affects the pricing of correlation in the inter-dealer broker (IDB) market. The one exception to this is hedge funds, which typically sell correlation via correlation swaps.


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