Related papers: Introduction into "Local Correlation Modelling"
The programmable and composable nature of smart contract protocols has enabled the emergence of novel market structures and asset classes that are architecturally frictional to implement in traditional financial paradigms. This fluidity has…
This paper studies equity basket options -- i.e., multi-dimensional derivatives whose payoffs depend on the value of a weighted sum of the underlying stocks -- and develops a new and innovative approach to ensure consistency between options…
Local Volatility (LV) is a powerful tool for market modeling, enabling the generation of arbitrage-free scenarios calibrated to all European options. To implement LV, we need to interpolate and extrapolate option prices. This approach is…
In this article, we analyze two modeling approaches for the pricing of derivative contracts on a commodity index. The first one is a microscopic approach, where the components of the index are modeled individually, and the index price is…
Understanding regional Consumer Price Index (CPI) dynamics is essential for timely and effective economic policymaking. However, traditional modeling procedures typically rely only on parametric panel modeling with low-frequency and…
We introduce the Local Occupied Volatility (LOV) model that sits between Dupire's local volatility and fully path-dependent dynamics. By design, the LOV model ensures automatic calibration to European vanilla options, while offering the…
Local volatility is an important quantity in option pricing, portfolio hedging, and risk management. It is not directly observable from the market; hence calibrations of local volatility models are necessary using observable market data.…
We propose to model multivariate volatility processes based on the newly defined conditionally uncorrelated components (CUCs). This model represents a parsimonious representation for matrix-valued processes. It is flexible in the sense that…
We study the dependence structure of market states by estimating empirical pairwise copulas of daily stock returns. We consider both original returns, which exhibit time-varying trends and volatilities, as well as locally normalized ones,…
We study a new measure of codependency in the second moment of a continuous-time multivariate asset price process, which we name the realized copula of volatility. The statistic is based on local volatility estimates constructed from…
We investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible…
Multivariate volatility modeling and forecasting are crucial in financial economics. This paper develops a copula-based approach to model and forecast realized volatility matrices. The proposed copula-based time series models can capture…
Conditional local independence is an asymmetric independence relation among continuous time stochastic processes. It describes whether the evolution of one process is directly influenced by another process given the histories of additional…
We propose a score test for dependence predictability in conditional copulas that is robust to temporal instabilities. Our semiparametric procedure accommodates flexible dynamics in the marginal processes and remains agnostic about the…
This paper introduces an innovative method for constructing copula models capable of describing arbitrary non-monotone dependence structures. The proposed method enables the creation of such copulas in parametric form, thus allowing the…
We show that the frequent claim that the implied tree prices exotic options consistently with the market is untrue if the local volatilities are subject to change and the market is arbitrage-free. In the process, we analyse -- in the most…
The Chicago Board Options Exchange Volatility Index (VIX) is calculated from SPX options and derivatives of VIX are also traded in market, which leads to the so-called ``consistent modeling" problem. This paper proposes a time-changed…
We formulate a forward inflation index model with multi-factor volatility structure featuring a parametric form that allows calibration to correlations between indices of different tenors observed in the market. Assuming the nominal…
High frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well stablished by empirical evidence. Specifically, probability distributions have the following…
The estimation of dependencies between multiple variables is a central problem in the analysis of financial time series. A common approach is to express these dependencies in terms of a copula function. Typically the copula function is…