The correlation tag has no wiki summary.
23
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5answers
2k views
How do I graphically represent the evolution of a covariance matrix over time?
I am working with a set of covariance matrices evaluated at various points in time over some history. Each covariance matrix is $N\times N$ for $N$ financial time-series over $T$ periods. I would ...
22
votes
6answers
5k views
How are correlation and cointegration related?
In what ways (and under what circumstances) are correlation and cointegration related, if at all? One difference is that one usually thinks of correlation in terms of returns and cointegration in ...
17
votes
2answers
981 views
How to quickly estimate a lower bound on correlation for a large number of stocks?
I would like to find stock pairs that exhibit low correlation. If the correlation between A and B is 0.9 and the correlation between A and C is 0.9 is there a minimum possible correlation for B and C? ...
13
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3answers
4k views
Correlation between prices or returns?
If you are interested in determining whether there is a correlation between the Federal Reserve Balance Sheet and PPI, would you calculate the correlation between values (prices) or period-to-period ...
13
votes
3answers
2k views
Time-series similarity measures
Suppose I have two time series $X$ and $Y$ of stock prices. How do I measure the "similarity" of $X$ and $Y$?
(I'm being deliberately vague as I don't have a particular application, and I'm curious ...
13
votes
4answers
643 views
Approximately what proportion of a stock’s volatility is explained by market movement?
Assume we decompose the daily (log) returns of a stock as beta times market movement plus an idiosyncratic part. If this is done ex-ante, what proportion of the variance is explained by the market ...
13
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3answers
3k views
What is the best way to “fix” a covariance matrix that is not positive semi-definite?
I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix).
I am ...
11
votes
6answers
1k views
Why does the VIX index have *any* correlation to the market?
It appears that the log 'returns' of the VIX index have a (negative) correlation to the log 'returns' of e.g. the S&P 500 index. The r-squared is on the order of 0.7. I thought VIX was supposed to ...
11
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2answers
2k views
How do I find the most diversified portfolio, or least correlated subset, of stocks?
I have a trading system that chooses top 10 stocks in Nasdaq 100 ranked on relative strength and some other factors. However, I'd like to take positions in only 5 of these 10 stocks based on how ...
11
votes
3answers
688 views
How to detect regime change when estimating asset correlation from historical time series?
Suppose I have two asset time series, $X_t$ and $Y_t$, and I'm estimating their correlation from historical data. I'd like to apply some systematic criterion to estimate what time window I should use ...
11
votes
1answer
664 views
Cleansing covariance matrices via Random matrix theory
I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
10
votes
2answers
669 views
Simulating Returns
I'll start this off with a rather broad question: I am trying to simulate returns of a large number of assets within a portfolio of different classes - equity and fixed income in a first step, say 100 ...
10
votes
1answer
209 views
What weights should be used when adjusting a correlation matrix to be positive definite?
I have a correlation matrix $A$ for an equity market that is not positive definite. Higham (2002) proposes the Alternating Projections Method, minimising the weighted Frobenius norm $||A-X||_W$ where ...
9
votes
6answers
833 views
How to generate a random price series with a specified range and correlation with an actual price?
I want to generate a mock price series. I want it to be within a certain range and have a defined correlation with the original price series.
If I choose, say, oil, I want as many time series which ...
9
votes
3answers
429 views
How would you test the hypothesis “There are no idiosyncratic returns available in the market”?
A commentary attributed to Matt Rothman had recently (in the past six months) been making the rounds of the internet echo chamber claimed "There are no idiosyncratic returns available in the market". ...
9
votes
1answer
714 views
What are the advantages / disadvantages of the ANTICOR algorithm?
The algorithm is introduced in the paper, Can We Learn to Beat the Best Stock.
The obvious advantage is superior risk-adjusted returns (if you can actually achieve them). Transaction costs and ...
9
votes
1answer
341 views
How to estimate the covariance of an index with a basket of stocks?
What would be an ideal way to estimate the covariance of an index with a basket of stocks? For example, should I use one-tail ANOVA test or an individual stock & index F-test?
8
votes
1answer
388 views
Meta-view of different time-series similarity measures?
While I spend most of my StackExchange time on MathematicaSE, I'm in the business and follow the questions and answers on this site with great interest.
Recently questions like the following (and ...
7
votes
3answers
751 views
How do I estimate the joint probability of stock B moving, if stock A moves?
I have two stocks, A and B, that are correlated in some way.
If I know (hypothetically) that stock A has a 60% chance of rising tomorrow, and I know the joint probability between stocks A and B, how ...
7
votes
3answers
414 views
Does random matrix theory (RMT) for returns' correlation matrices apply if there are high correlations?
Steps to replicate:
Take the correlation matrix of a sample of stocks in the SP500, or a set of ETF's that are include some that are highly correlated (0.7 and above).
Problem observed:
I observe ...
6
votes
3answers
258 views
age-sensitive correlation measurements in finances
When it comes to comparing returns or prices of instruments like stocks/ETFs, are there any well-established formulas, or ones in common use, that place stronger emphasis on recent correlations more ...
6
votes
2answers
312 views
The T+H Problem in Factor model forecasts
Suppose we train on M individuals consisting of T observations (i.e. TxM design matrix). The dependent variable is one-year return for each security (H = horizon of one year). In a factor model ...
6
votes
1answer
518 views
If stock A has a 60% chance of rising, and stocks A and B have 80% correlation, what is the chance of stock B rising?
As in the subject, I'm interested in a math puzzle of sorts:
If stock A has a 60% chance of rising, and stocks A and B have an 80% correlation, what is the chance of stock B rising?
Would it be ...
6
votes
1answer
177 views
Measuring co-movement at non-constant intervals
Correlation measures how much two series move together over a fixed interval. Are there any techniques that measure co-movement over a variable time frame? One technique I am aware of is concordance.
5
votes
2answers
228 views
Correlation decay in lognormal distribution
I noticed that if you use two correlated geometric brownian motions, the correlation structure decays in time pretty fast even for really high correlation values.
I think that is not replicating ...
5
votes
1answer
513 views
How to simulate correlated assets for illustrating portfolio diversification?
I have seen multiple instances where people try to explain the diversification effects of having assets with a certain level of correlation, especially in the "most diversified portfolio" literature. ...
5
votes
2answers
424 views
cointegration applied to Portfolio Construction & Risk management
There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc.
But there ...
5
votes
2answers
274 views
Correlation: Test for linear dependence
Setting the scene: Assume a multivariate GBM with correlation matrix $\Sigma$. Further, one want to estimate the correlation between two of the assets. Assume one has a suitable estimator of the ...
5
votes
1answer
167 views
RMT (Random Matrix Theory) issue with callibrating MP distribution -
I am seeing an issue when callibrating an MP distribution. Assume a log return series for the SP500 with the following dimensions
dim(xts.sp500.ret.stocksonly)
==> [1] 1133 478
...
5
votes
0answers
156 views
Alternative ways to understand time-varying comovement between two time-series?
I have been looking into ways to better understand how the dependencies/correlations/etc between two time series can vary over time.
I first thought about using a Kalman/particle filter over a ...
4
votes
4answers
784 views
How can I select the least correlated portfolio of assets?
Can anyone explain the process and the calculations needed to select a portfolio of liquid futures assets with the least correlation? Given a set of returns for a series of assets, how do I select the ...
4
votes
2answers
191 views
Most natural generalization of covariance/correlation to model dependence of extreme events
One of the most serious shortcomings of covariance/correlation are the assumptions of linearity and normality.
What is the most natural generalization of these measures of dependence when you want to ...
4
votes
1answer
173 views
Stability of correlations and volatility
I had a discussion recently about the stability of volatilities and correlations. If we take for example stocks and bonds (think of DAX and Bund) then I have seen changing volatilities (something like ...
4
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1answer
170 views
Can we explain physical similarities between Black Scholes PDE and the Mass Balance PDE (e.g. Advection-Diffusion equation)?
Both the Black-Scholes PDE and the Mass/Material Balance PDE have similar mathematical form of the PDE which is evident from the fact that on change of variables from Black-Scholes PDE we derive the ...
4
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0answers
89 views
Rolling window Kendall's tau against APARCH(1,1) correlation
Assume you want to forecast the correlation matrix of a stocks' basket (say 15 ~ 20 stocks from different sectors); assume you need to forecast at $T$ days because you will use the forecast ouput with ...
4
votes
0answers
133 views
Taking into account the correlation in Barrier options on a Basket
In a Barrier option (where the contract cancels when the underlying hits the barrier) I succesfully found the way to compute the probability of a single underlying touching the barrier (with constant ...
3
votes
1answer
78 views
Is there a copula that can estimate negative tail dependence?
I have encountered numerous copula estimators that can estimate time-invariant and time-varying linear and non-linear correlations on the interval $[-1,1]$, and these estimators are fully consistent ...
3
votes
1answer
107 views
When the Inverse Correlation between the SPX and VIX breaks down
As we all know the S&P and its implied vol, the VIX, generally move in opposite direction. To a large extent, the correlations makes sense. IV is one of the main drivers of the price of options, ...
3
votes
1answer
178 views
Rank Correlation Based Prediction
Are there any methods of prediction (machine learning, regression, etc.) which are designed to maximize the rank correlation (spearman correlation, kendall's tau, etc.) of your prediction with your ...
3
votes
1answer
148 views
Is it possible to estimate the correlation between an equity and its IV, purely from its IV skew?
If we know the options Implied Volatility (IV) skew for an equity, is it possible to calculate the probability of the equity moving, given a move in the IV?
We can define IV skew as the difference ...
3
votes
1answer
68 views
How can I evaluate how poor a fit a parametric VaR result would be for a given holding?
I'm currently working on an application that, among other things, computes a one-day parametric VaR for security positions. I understand that the parametric method of computing VaR is a poor fit for ...
3
votes
1answer
208 views
Does the correlation amongst stocks rise when stock values decline?
Is there any research on whether the correlations among stocks rise when stock indices decline? Which model could account and test for that effect ? Maybe GARCH-BEKK, or some models using copulas?
3
votes
3answers
422 views
portfolio diversification tester
Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined ...
3
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0answers
81 views
Stress testing covariance
Going one level beyond stressed scenarios, to parameters e.g. for a VaR measure: what are the most common approaches for stressing a covariance/correlation matrix, especially taking portfolio exposure ...
2
votes
1answer
94 views
Combining covariances?
Consider an economy with assets with return processes $A$, $B$, $C$, $D$. Consider a weighted index with return process $I=aA + bB + cC + dD$ where $a,b,c,d$ are coefficients, and $a+b+c+d = 1$.
...
2
votes
2answers
268 views
How to calculate cumulative loss from two factors that have negative correlation?
I went through the most advanced books on statistics and still can't find an answer. There is a well known formula for combining volatility of two correlating variables, but what about adding the ...
2
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0answers
242 views
How to calculate correlations(COT report) in R ? [closed]
First thing i want to do is load data(.csv) into R. The data i am concentrating are the COT reports. Want to load a single column into R and calculate the correlation with the proper instrument.
1
vote
1answer
128 views
Testing Significance of Correlation
Lets say I have the returns of two stocks(stock1 and stock2). Now without running a regression, I lag one of the variables, calculate the correlation between the two stocks and repeat this process as ...
1
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2answers
123 views
Buying one company or index against another, is this readily possible with options, with an accurate return (also Alpha Indexes)
There's a relatively new product in the market / on the Nasdaq called Alpha Indexes. It lets one own a company -- e.g. Apple, GE, Google, etc -- as the difference between how that company does (the ...
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0answers
84 views
how to identify similar assets based only on a few price samples
Using quantitative finances techniques on limited information, how might one go about finding similar(highly correlated) assets whose public information is available? The only data offered on a list ...
