April 3rd, 2013, 11:36 am
QuoteOriginally posted by: HLFXattempting to use implied volatilityThey must have oil options in both countries denominated in local currencies, right? Maybe if the oil tails are fatter in euros than in dollars, that implies the correlation direction of dollars and euros during extreme events in that commodity.Maybe then you could curve-fit a model where the tails in equities are explained partially by volatility in commodities. Say commodities have a flat distribution, and equities have a distribution that is the sum of a normal distribution plus correlation to a portfolio of flatter distributions, including your commodities. So the correlation of equities to commodities would be implied as whatever correlation is required to get the shape of the equity implied distribution, as a sum of the normal distribution implied by nearby options plus the correlation to the implied oil distribution.
Last edited by
farmer on April 2nd, 2013, 10:00 pm, edited 1 time in total.