Download This PaperA Unified Stochastic Volatility - Stochastic Correlation Model
26 Pages Posted: 16 May 2020 Last revised: 27 Jul 2020
Date Written: April 20, 2020
Abstract
We propose a simple but rigorous stochastic volatility – stochastic correlation model, formulated as a pair of correlated CIRCEV and Jacobi processes. Our model proves to fit both marginal and joint distributions of implied volatility and correlation. When risk factors estimated from derivatives markets are accounted for, we show the model out-performance over GBM is substantial for index returns.
Keywords: Stochastic Volatility, Stochastic Correlation, CKLS, CEV, CIR, Jacobi
JEL Classification: C12, C32
Suggested Citation: Suggested Citation
Meissner, Gunter A. and Sherwin, Hong, A Unified Stochastic Volatility - Stochastic Correlation Model (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=3581224 or http://dx.doi.org/10.2139/ssrn.3581224
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