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Stochastic volatility models for the implied correlation index

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  • Escobar, Marcos
  • Fang, Lin

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.

Suggested Citation

  • Escobar, Marcos & Fang, Lin, 2020. "Stochastic volatility models for the implied correlation index," Finance Research Letters, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:finlet:v:35:y:2020:i:c:s154461231930056x
    DOI: 10.1016/j.frl.2019.101309
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