Asset Correlations in a World of Abnormal Asset Volatility
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Document ID: 1998-349 (previously Report 39)
Published on: 1st November 1998
The financial markets’ implied view of prospective asset volatility is embedded into option prices. As an alternative to historic asset volatility, these implied volatilities can be used as a foundation for all sorts of risk estimation exercises. However, when market volatilities are used in a risk calculation, we also need to understand how the correlation relationships among assets should simultaneously be modified. This paper presents some simple and not-so-simple responses to the challenge.
