Saturday, July 29, 2006

Correlation smile...

Looks like the good old smile (or smirk) problem comes back in the credit derivatives market. We spent some time in the Derivatives class trying to understand why the smile exists in equity derivatives, which implies that the BS assumptions dont apply to the way the market prices these instruments.

Similarly, the one-factor Gaussian Copula model, while widely used, doesnt reflect market beliefs, thus producing an implied correaltion smile for the different tranches of say a CDX index. While an open ended question, some believe that its because the fat tails are not captured adequately by the gaussian copula model.


Blogger Kwaj said...

Derman dedicates pretty much a whole chapter to the anomaly (and his subseqeuent approach to interest rate smiles) in his book "My Life...". Worth a read, if you've never read it.

- Kwaj

6:04 PM, July 30, 2006  
Blogger Vivek said...

Hello Swaroop,

My name is Vivek. I need to get in touch with you. This is totally regarding MFE.

I finished my masters in Mech Eng from TAMU and then came back to India and since then been working with DaimlerChrysler Research and Technology India.

I was interested in this MFE progarm and wanted to get in touch with you and use your advice.

Please let me know.



2:50 AM, August 01, 2006  
Blogger Quantjock said...

You can post any questions on this blog.. and I can answer your specific queries. There is also a lot of information on global-derivatives and wilmott forums..


1:05 AM, August 02, 2006  
Blogger abhinav sharma said...

hi quantjock,
i am interested in an mfe at haas. i am currently working in the financial sector only as an equity analyst. have been thru global derivatives, quantfinance and wilmott, but not many cud answer my queries. cud i mail u my queries et al sometime..
my mail id is

thanks a lot,

9:17 PM, August 02, 2006  
Blogger Quantjock said...

you can email me at However, I may not be too prompt due to my finals..

11:31 PM, August 02, 2006  

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