Breaking correlation breaks

Breaking correlation breaks

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