# Tagged Questions

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

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### Correlation Between 2 Portfolios

I have a set of assets, n. I'm trying to find the correlation between 2 portfolios, say x and y, where x is nested in, or, a sub-set of y. That is, x is a portfolio based on a sub-set of n, while y is ...
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### Estimating correlation using EWMA

I am using an EWMA model to evaluate the correlation between yearly time series. I know Riskmetrics uses $\lambda=0.94$ for daily data and $\lambda=0.97$ for monthly data. Is there a value ...
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### Interpretation of Correlation

I have two geometric Brownian motions (GBMs) driven by the same underlying Brownin motion, namely \begin{align*} S_t^1 = S_0^1\exp\left(\left(\mu_1 - \frac{\sigma_1^2}{2}\right)t + \sigma_1 W_t\right),...
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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 ...
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### Right metric to manage a portfolio based on correlation?

I want to algorithmically add a new investment to an existing portfolio. The decision should be based on a low correlation to the existing assets. E. g. the following situation The portfolio ...
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### 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 ...
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### Why do stocks with a negative beta return less than the risk free rate?

Let's say we have two stocks, Stock A and Stock B. Both of them have the same standard deviation $\sigma$, and therefore have the same risk. The only difference is that Stock A has a perfect ...
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Lets assume I want to normalize some stock data ( prices or log prices) to compare for different types of correlation for example. And here is the question how should I normalize: a) by subtracting ...
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### Garch for covariance matrix?

I have seen plenty of literature about GARCH on estimation volatility. how about covariance? There are plenty of risk models depending on the covariance matrix. I guess we can assume the correlation ...
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### How to account for correlation between strategies when they are added linearly?

There are n strategies which are going to be combined linearly. Using a pre-exisiting model I get a set of n weights which will be used to combine the strategies. But the model does not take ...
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### correlation for portfolio of stocks

I have a portfolio of stocks and all I want to do is to make sure that I'm not trading one big position, so I would like to monitor some type of metric that gives me a rough idea of what the overall ...
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### hedging correlated instruments

If two instruments have a significant negative correlation but the percent change in the price of the instrument moving in positive direction is always more by a fraction than the one moving in ...
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### Can the Minimum Variance Hedge ratio be greater than 1?

The Minimum Variance Hedge ratio is defined as: $h = \rho * \frac{\sigma_S}{\sigma_F}$ For correlation $\rho$ and $\sigma_S , \sigma_F$ for S.D. of changes in asset and future prices accordingly. ...
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### Regime Switching for Dynamic Correlations

I would like to implement a Regime Switching for Dynamic Correlations in an out-of-sample analysis using MATLAB. After looking at the literature on the subject, they all refer to an article by Denis ...
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### How can I forecast future correlation?

There are some standard models for forecasting volatility (e.g., GARCH) and for forecasting returns (e.g., factor models). What kind of standard models exist for forecasting future correlation between ...
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### Time-Varying Copulas (GAUSS)

Could anyone suggest me how to begin with Time-varying Copulas or Stochastic Copulas? I'm looking for the GAUSS code, however it seems there are only MATLAB code available over the internet. I'm ...
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### Should I use a correlation coefficient formula or a multiple regression formula?

I have an assignment dealing with the stock market and I'm a little lost. My instructions are to come up a method to create a score for a stock then compare the score against what the stock actually ...
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### Why can't I multiply two SDE Solutions?

SDE 1 is S1 = S10 exp( (r1-sigma^2/2) * dt + sigma dW1 ) S2 = S20 exp( (r2-sigma2^2/2) * dt + sigma2 dW2 ) E[dW1 dW2] = rho I want to price an option on S1 x S2 I know I need to use the SDE's to ...
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### Two correlated time series - driver and follower

Say that there are two time series of highly correlated stocks one of which is the driver and the second one follows the first one. What mathematical measure or formula would you use to identify ...
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### Does the correlation of matrices have explanatory power when building a pattern recognition model?

I'm using 8 different variables (with daily observations) with the purpose to compare different months across the historical data. For that purpose I calculate the correlation between each month and ...
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### Pricing inflation lags

I've been looking into a short piece of maths I found on pricing inflation with payment delays, and was hoping someone could confirm whether my understanding was correct or if the maths isn't quite ...
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### Inflation/Rates Correlation

I've been looking into a short piece of maths a colleague has written on pricing inflation with payment delays, and was hoping someone could confirm whether my understanding is correct, or if my ...
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### Explain drop in Correlation between two time series in consecutive periods

I have a time series for a security list with 2 parameters calculated for each time period. For example, for a stock XYZ, I have Param1 and Param2 calculated over various time periods stacked against ...
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### Analog - Pattern Recognition model using KNN

I'm building a pattern recognition model for my master thesis. The idea is to build a framework with some Macro variables (long/short term rates; rates differential; equity; fx; vix) in order to find ...
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### Is this a reasonable approach to determine the relative importance of valuation factors?

I am trying to come up with a measure of relative importance of a number of valuation factors. I am wondering whether correlation coefficients can't be used for determining this. More on the issue: ...
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### Harnessing small correlations for reliable profit

It is said that Edward O. Thorp was able to harness small correlations for reliable financial gain. I've seen some strategies based on strong correlations which did not seem particularly reliable. ...
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### 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 ...
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### 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 ...
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### Can we model components in a set of multivariate multi-period time-series data?

There are N data sets in periods occurring weekly/monthly, across a 10-year historical timeline. In each period, five dates are observed (labelled a to e), where a denotes the day the period starts/...
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### Need overlapping sample autocorrelation correction for calculating asset return correlations

I want to measure the covariance structure of various asset returns based on varying investment periods. Campbell and Viceira (2005) do this, using known return predictors (i.e. dividend yield, ...