The Interplay between Stochastic Volatility and Correlations in Equity Autocallables

Abstract

We investigate typical equity worst-of autocallable structures within industry-standard multi-dimensional stochastic local volatility models. Introducing the corresponding effective local volatility models we show how the correlations between the stochastic variances play a central role in autocallable prices and risk management. A key observation is that the surprisingly rich pricing behaviour cannot be understood based on the common belief that stochastic volatility only reduces the spot/spot correlation.

Keywords: Autocallables, Stochastic Local Volatility, Correlation, Worst-Of