SciCADE 2013
International Conference on Scientific Computation and Differential Equations
September 16-20, 2013, Valladolid (Spain)

Invited Talk

Show full list of Invited Contributions to Minisymposia Show talk context (MS21)


A General Approach for Stochastic Correlation using Hyperbolic Functions

M. Ehrhardt, L. Teng and M. Günther

Abstract
It is well known that the correlation between financial products, financial institutions, e.g., plays an essential role in pricing and evaluation of financial derivatives. Using simply a constant correlation may lead to correlation risk, since market observations give evidence that the correlation is not a deterministic quantity. In this talk, we suggest a new approach to model the correlation as a hyperbolic function of a stochastic process. Our approach provides a stochastic correlation which is much more realistic to model real world phenomena and could be applied in many financial fields. As an example, we compute the price of quanto applying our new approach. Using our numerical results we investigate the effect of considering stochastic correlation on pricing the quanto.

Bibliography
[1] C. van Emmerich, Modelling Correlation as a Stochastic Process, University of Wuppertal, Working Paper, 2006.
[2] C. van Emmerich, A Square Root Process for Modelling Correlation, University of Wuppertal, Dissertation, 2007.

Organized by         Universidad de Valladolid     IMUVA