A dynamic model for correlation

Most investment banks utilise a Gaussian copula to price multi-asset exotic European-style payouts. For more involved payouts, a multi-asset version of Dupire’s local volatility model has become the market standard for pricing and hedging. The model infers a local spot-dependent volatility surface from option prices for each asset and combines them via a (constant) correlation matrix between its Wiener increments. However, even when correlations are assumed to be time-dependent, the model does

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