Breaking correlation breaks

Adil Reghai
23 Sep 2010

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Local correlation has been thoroughly studied in physics in order, for instance, to describe interactions between electrons. In financial mathematics, most research on correlation comes from the credit derivatives industry, such as deriving joint-default distributions consistent with the correlation skews observed on collateralised debt obligation tranches quotes thanks to local Gaussian copulas (Burtschell, Gregory & Laurent, 2005). In equity derivatives, Avellaneda et al (2002) approximated

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