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Stochastic volatility models for the implied correlation index

Marcos Escobar Anel () and Lin Fang

Finance Research Letters, 2020, vol. 35, issue C

Abstract: This paper studies the implied correlation index (CIX), revealing a new stylized fact: heteroscedasticity in correlation. A correlation stochastic volatility (C-SV) model is proposed and a consistent estimation methodology is implemented on CBOE S&P 500 CIX historical data. The impact of the SV parameters is studied for two types of crisis-motivated CIX derivatives, and the empirical study demonstrates that new parameters can have a significant influence of up to 60% on digital option prices.

Keywords: Implied correlation index; Stochastic volatility models; Mean reversion; Correlation derivatives (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:35:y:2020:i:c:s154461231930056x

DOI: 10.1016/j.frl.2019.101309

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