Local Stochastic Correlation Models for Derivative Pricing

Marcos Escobar-Anel ()
Additional contact information
Marcos Escobar-Anel: Department of Statistical and Actuarial Sciences, Western University, 1151 Richmond Street, London, ON N6A 5B7, Canada

Stats, 2025, vol. 8, issue 3, 1-10

Abstract: This paper reveals a simple methodology to create local-correlation models suitable for the closed-form pricing of two-asset financial derivatives. The multivariate models are built to ensure two conditions. First, marginals follow desirable processes, e.g., we choose the Geometric Brownian Motion (GBM), popular for stock prices. Second, the payoff of the derivative should follow a desired one-dimensional process. These conditions lead to a specific choice of the dependence structure in the form of a local-correlation model. Two popular multi-asset options are entertained: a spread option and a basket option.

Keywords: local correlation; closed-form prices; spread option; basket option (search for similar items in EconPapers)
JEL-codes: C1 C10 C11 C14 C15 C16 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2571-905X/8/3/65/pdf (application/pdf)
https://www.mdpi.com/2571-905X/8/3/65/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jstats:v:8:y:2025:i:3:p:65-:d:1704566

Access Statistics for this article

Stats is currently edited by Mrs. Minnie Li

More articles in Stats from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().