Implied Correlation
The correlation level that, when plugged into the variance-of-a-portfolio identity (index variance = sum of weighted single-name variances plus weighted covariance pairs), reconciles the observed implied volatility on an index with the implied volatilities on its constituents. Reverse-engineered from option prices, not directly observed. Tracking implied correlation over time reveals when the market is pricing in elevated co-movement (typical during stress regimes) vs differentiation across single names (typical during calm regimes). The input for dispersion-trade construction.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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