Title: Financial crisis indicators based on implied correlations computed from option prices
Authors: Antoine Kornprobst - University Paris Sorbonne (France) [presenting]
Abstract: The aim is to build financial crisis and systemic risk indicators based on the study of the differences between implied volatilities and correlations, which are computed using available option (and option baskets) prices, and realized volatilities and correlations, which are computed from historical spot prices. This forward-looking approach using computed implied quantities is popular at the moment and many market tools, like the CBOE Volatility Index (VIX) and several CBOE Implied Correlation Indices, are based on similar ideas. Our approach is novel in the sense that we intend to build financial crises indicators and market forecasting tools based on implied correlations between the components or sector components of several equity indices. The first part of the study builds practical tools based on the daily comparison between implied and realized correlations, explore the link between our indicators and the CBOE indicators and also attempt to replicate the results of the CBOE Implied Correlation Indices. Then, in a second part, optimal active trading strategies based on those financial crisis indicators are constructed and tested against typical passive investment strategies.