# Tagged Questions

A measure of the degree of linear association between a pair of random variables.

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### How to estimate an Engle's asymmetric DCC model in R?

I have a $N x d$ matrix of standardized residuals, and I want to estimate the parameters $\alpha$, $\beta$ and $\gamma$ of the asymmetric version (Cappiello, Engle, Sheppard, 2006) of the usual ...
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### How exactly are correlated defaults used/analyzed?

I've read a lot about correlate defaults but I can't seem to understand how they're used practically in a portfolio theory setting. Suppose I have two (?) companies, X and Y, and historic default ...
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### I have a test coming up and I could really use an explanation to this example problem

This test is on CAPM and portfolio optimization Suppose that investors A and B can invest in two risky assets and a riskless asset. The first risky asset has an expected annual return of 10%. The ...
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### Correlation between asset A and Portfolio X (which contains A)

After a few hours trying to solve this I give up! I need help. I need to calculate the BETA of an asset with respect to a portfolio that contains this asset. I have the volatility and correlations ...
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### Creating index from bloomberg data in matlab

I'v got 6 different equity index time series from which I want to create an index based on a particular percentage. This would be simple although due to different holidays the date don't always match. ...
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### Correlation of Asynchronous Brownian Motion

I am trying to use the closing prices of the S&P 500 and the Nikkei Index to see how they are correlated (assuming they are exactly 12 hours apart). In order to test my method, I have generated ...
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### Correlation between 2 stocks [closed]

If Stock A returns 5% on average in year Y And Stock B returns 2% on average in year Y Does this mean that correlation is 40%?
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### Correlation: Use Price or Return? Return doesn't make sense [closed]

I am trying to find the correlation between the returns of two indices over a long period of time (10 years+) . Should I be using the index daily price level or the index daily total return? Most ...
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### Correlate the G2++ with a GBM model

In Matlab one can use the LinearGaussian2F function together with the simTermStructs function to create a simulated zero curve based on the G2++ model. Next to simulating the interest rates I need to ...
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### building a correlation of equity portfolio to custom benchmark 60/40

Hi i have built a custom portfolio of equities with weights but would like to plot the daily, monthly and annual correlation to 60/40 benchmark. Please see code below and suggest how I can do the ...
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### Bounded Stochastic discrete process

I just came across this stochastic process (link): $dY_t = (a-bY_t)dt + c \sqrt{Y_t(1-Y_t)}dW_t$, where $dW_t$ is a Wiener Process. According to the author under certain conditions this process is ...
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### decompose correlation swap pnl

For a Variance swap we can split the pnl into a realized part and a "forward going" part. To be more precise: Assume we enter the trade at t0, and the variance swap has tenor T and a strike $Kvar$. ...
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### Monte Carlo - Inflated Asset Paths Due to Correlation

I built a MC generator for 12 assets based on Brownian Motion and noticed some strange results. Formula Used S(t) = Exp(S(t-1) + (mean - (vol. / 2)) + (stdev * Normal Distribution #)) S(0) = Ln(1) ...
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### Portfolio Analytic Metrics for Portfolios with Serially Correlated Returns

I just read Andrew Lo's paper from 2002 "The Statistics of Sharpe Ratios" and am wondering if anyone knows of any other papers/docs/resources that explore the impact of serially correlated returns on ...
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### Measuring strength of correlation for bivariate time series

In case of a bi-variate time series with both I(0) how do I measure the strength of co-relation. I am looking for measure similar to R-squared but ideal measure may not be one of the variants of r-...
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### What is the standard length for rolling correlation in financial time series?

I know this is highly subjective, but is there any theory behind choosing a window period for rolling correlations? If I do 1-day or 2-day rolling correlations between highly correlated positions, ...
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### Estimate Beta of CAPM from Implied Volatility?

In the CAPM theory Beta of asset $i$ are estimated in this way: $\beta_i = \frac{\sigma_{im}}{\sigma^2_m}$ where $\sigma_{im} = \rho_{im} \sigma_i \sigma_m$ But all these data are historical data. ...
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### Why do volatility and correlation increase in times of crisis?

can somebody please explain to me why volatility and correlation increase in times of crisis? It is connected somehow to the herding effect. But I cannot really explain it. And also why are negative ...
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### What is the preferred GARCH method in practice?

My advance apologies, if this question is too naive or basic. Please be patient with my first experiences with SE; ask for clarification, if needed. I recognize there are many (often-criticized) ...
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### Stochastic correlation arbitrage-free replication

I'm interested in possibility of stochastic correlation arbitrage-free replication (something VIX-style, mayby). To my knowledge, no such method exists. Could you provide some intro to the problem: ...
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### How to distinguish true negative eigenvalues from small negative eigenvalues due to floating point error?

Floating points have rounding errors so algorithm to find eigenvalues may report tiny negative eigenvalues but in reality thsee could actually be 0 if we had full precision. Any way to tell ? I have ...
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### Why do CFDs track the underlying?

My understanding of CFDs is that the profit you make on a CFD is the difference between the price at which you bought the CFD and the price at which you sold your CFD minus various charges/commission. ...
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### Why is credit exposure higher for a smaller probability of default than for a larger default?

I'm having trouble grasping this concept; I don't see the relevance of the explanation given in the text (Gregory, Counterparty Credit Risk and CVA) either. When expected exposure and probability of ...
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### What do you do with low r-squared when calculating high-frequency beta

I am calculating a high-frequency beta. For example I have 90 days of data of the S&P and GOOGLE and I have 10-minute percent returns for each instrument. Each day has 34 10-minute percent returns ...
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### volume-returns cross correlation interpretation

I want to find the relationship between volume and price returns in the S&P500. My first thought was to run a cross correlation in order to find who leads and who lags in the relation. ItÂ´s my ...
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### bootstrap asset allocation

I want to ask if the bootstrap method for asset allocation is preferable. For instance, suppose that we have data for the past returns for two stocks. Is it wise to generate the efficient frontierby ...