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Akasha
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Implied Correlation

May 21st, 2014, 8:57 am

Is there a way to retrieve the implied correlation between the zero-coupon bond and stock price from market quotes?
 
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sladner
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Implied Correlation

May 21st, 2014, 5:27 pm

realistically, no.
 
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Alan
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Implied Correlation

May 21st, 2014, 7:10 pm

You might take a look at Merton's 'Alternative Derivation of the Black-Scholes Model' in his CT Finance book (pg 284 in my copy).The BS formula vol contains such a correlation in Merton's version, and perhaps an implied correlation can be extracted.
 
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ppauper
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Implied Correlation

May 21st, 2014, 8:33 pm

When you calculate implied volatility for an option, you have all the other inputs save volatility and find the value of volatilty for which the model price matches the observed priceif the derivative depends on zero-coupon bond price (or a proxy like interest rate) as well as stock price, there will be what 2 ? 3 ? unknown inputs (stock price volatility, the correlation, and perhaps interest rate volatility also), but you only have the one price, so I assume to find the implied correlation you would have to somehow assign values to the stock price volatility and perhaps interest rate volatility also ?
 
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ronm
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Implied Correlation

May 23rd, 2014, 8:15 am

QuoteAs the stock moves up/down, the expected lifetime of the call will shorten / lengthen -but not the putCould you please elaborate this further?Thanks