The Term Structure of Implied Correlations Between S&P and VIX Markets

Join Prof. Laura Ballotta to explore the joint model for the S&P500 and the VIX indices with the aim of extracting forward looking market consistent information on the correlation between the two markets.

13:00 EDT / 18:00 BST / 19:00 CET

Abstract:

We develop a joint model for the S&P500 and the VIX indices with the aim of extracting forward looking market consistent information on the correlation between the two markets. We achieve this by building the model on time changed Lévy processes, deriving closed analytical expressions for relevant quantities directly from the joint characteristic function, and exploiting the market quotes of options on both indices. We perform a piece-wise joint calibration to the option prices to ensure the highest level of precision within the limits of the availability of quotes in the dataset and their liquidity. Using the calibrated parameters, we are able to quantify the‘leverage/volatility feedback’effect along the term structure of the VIX options and corresponding VIX futures. We illustrate the model using market data on SPX options and both futures and options on the VIX.

This is joint work with Ernst Eberlein and Gregory Rayée.

About the Speaker:

Laura Ballotta is a Professor of Mathematical Finance at Bayes Business School (formerly Cass). Prof. Ballotta works in the areas of quantitative finance and risk management. She has written on topics including stochastic modelling for financial valuation and risk management, numerical methods aimed at supporting financial applications, and the interplay between finance and insurance.

Recent major contributions have appeared in Journal of Financial and Quantitative Analysis, European Journal of Operational Research and Quantitative Finance among others.

She serves as associate editor and referee for several international journals in the field.

Prof. Ballotta holds a BSc in Economics from Universita’ Cattolica del Sacro Cuore, a MSc in Financial Mathematics from the University of Edinburgh, and a PhD in Mathematical and computational methods for economics and finance, from Universita’ degli Studi Bergamo.

She is the course director of the Quants cluster of MSc programmes at Bayes Business School.