# Tagged Questions

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

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### Normalization of Market Data in Time Series Correlation

Suppose we have 2 time series of market data, one for each security and we want to correlate between these 2 securities. My question is How do we handle gaps of missing data in the time series? ...
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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 ...
2answers
70 views

### 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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### 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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41 views

### Hedging using relative values

Consider I have two stocks $A$ and $B$, $A$ is trading at $\$40$and$B$at$\$30$. The standard deviation of its returns are $\sigma_A=25\%$ and $\sigma_B = 30\%$. Correlation between the returns is ...
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### What is Base- vs. Implied Correlation of a CDO tranche?

What is the difference between Base Correlation and Implied Correlation for a CDO tranche?
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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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79 views

### Estimate correlation of time series whose histories differ in length

Very often in quantitative analysis (e.g. calculating portfolio volatility) we have to analyze various time series - mostly returns - whose lenghts differ. Risk systems usually apply a one-factor ...
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113 views

### 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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62 views

### Correlation Multiple Currencies

If i have a portfolio of stocks from different currencies and i want to generate a correlation matrix from the stocks, how is the correct procedure ? Imagine a portfolio which the base currency is ...
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279 views

### Correlation between S&P500 returns and 10y US Treasuries yields

I'd like to investigate the comovement of stock index returns with bond yields but I don't know which return's duration to use (1-year, 1-month or anything else) to get a better view of the ...
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### Correlation of asset to portfolio, given certain variables

Ultimately I'm trying to calculate stdev contribution, but I've hit a hurdle. What I have: 20x20 correlation matrix for various assets Standard deviations for each asset Returns for each asset ...
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### Correlating random numbers seems to skew the data

First off, apologies for the cross-post from mathematics, but I found this site later and think it would be a better fit for the question (besides, there has been no comments/answers on mathematics ...
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### 2 stocks, no shorting vs shorting. (concrete questions, mean-variance)

I'd appreciate help with the following questions. Suppose there are two stocks $A$ and $B$ with expected returns $E_A, E_B >0$ and volatilities $v_A, v_B >0$, respectively . Also, suppose ...
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### Sample size and historical correlation matrices

I was wondering whether any literatures existed on how to properly estimate correlation matrices from historical data. Obviously the entire procedures allows a lot of leeway. The frequency of ...
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65 views

### Implied Correlation using market quotes

Is there a way to retrieve the implied correlation between stock price and zero coupon bonds?
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### High correlation will help detect spurious regression over cointegration?

I'm analyzing two financial time series with Johansen method. A high Correlation coefficient using the Pearson method will help me to detect spurious cointegration models to avoid? If this is not ...
3answers
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### Calculate correlation between two sub portfolios and the combined portfolio

I have two sub portfolios (lets call them portfolio a & portfolio b - a portfolio is just a vector of weights that sum to 1) that combine to create a total portfolio. I also have a 2 x 2 ...
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197 views

### Given a correlation martrix, calculate portfolio's correlation with its assets

Find correlation vector like $[ d e f ]$ where d, e and f represent correlation of P(portfolio) with its assets A, B and C respectively. The assets A, B, C can be another portfolio. In order for ...
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93 views

### Partition assets into minimally correlated portfolios

My question covers a more or less classical portfolio optimization situation with a twist: How to partition assets into minimally correlated portfolios, with and without asset overlap. I have $N$ ...
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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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### Is there a Newey West like correction for overlapping data correlation estimates?

I already posted a related question a while ago but was unsure if I should post within the same question. I want to estimate mulitperiod asset return correlations and test if there are significant ...
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362 views

### Why does it “say” portfolio diversification not suitable during market turmoil?

Currently I am trying to get a hold of MPT, asset allocation and related applications. While reading a particular resource, it says diversification works best for "normal" financial markets and ...
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81 views

### 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 ...
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249 views

### 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, ...
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220 views

### Co-integration constraints of coint(X,Z) given coint(X,Y) and coint(Y,Z)?

The Augmented Dickey-Fuller Test can be used to measure how well ranked certain pairs are against others for co-integration. So then say we have a known co-integration between ...
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113 views

### Correlation between idiosyncratic residuals and forward returns

The classic mean-reversion strategy is to calculate an "expected return" (alpha) by computing the raw return for each security and then remove the part which you think is market driven. Statistically ...
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174 views

### Multifractal Model, Generating Sample Paths with Correlations between Assets

I have studied option pricing using Geometric Brownian Motion to generate sample paths. Because of the normal distribution, it is easy to create a covariance matrix and get correlated asset returns. ...
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### Potential pitfalls in the use of correlation

Background: The red line is an index, which goes from 0 to 100, measuring uncertainty in the markets. The dark blue line is a price index, which has a lower bound at 0, and virtually no upper bound. ...
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1k views

### 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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100 views

### tail correlation during crisis

I am seeking a recommendation for an empirical paper on increased correlations of returns during the 2008 financial crisis, or 'tail correlation' during the crisis, if that is different, or whatever ...
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### Time-varying correlation via state-space representation and Kalman filter

Let a linear time-varying mode like this one: $y_{t}=\alpha_{t}+\beta_{t}x_{t}+\epsilon_{t}$. You can also suppress the constant term to simplify this example: $y_{t}=\beta_{t}x_{t}+\epsilon_{t}$. ...
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283 views

### Help with understanding a normal distribution/probability question

Could someone please help me translate what this is saying on page P15, section 4.2: http://www.ntuzov.com/Nik_Site/Niks_files/Research/papers/stat_arb/Ahmed_2009.pdf Specifically: When the ...
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339 views

### Non-intuitive correlation between S&P sector indexes and economic indicators

I am trying to understand how changes in economic indicators like Unemployment Rate, Inflation Rate, and Consumer Sentiment affect the portfolio values. For that I want to measure the correlation ...
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627 views

### Counterintuitive time varying Beta with Kalman filter

If you're used to play with R, you'll enjoy the following reproducible code: ...
2answers
264 views

### How to deal with zeroes in returns?

Suppose there are two time series that I want to analyze and compare. However, many, or most, of the data are zeroes for some reason. For example, consider a pair of intraday trading returns time ...
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763 views

### Principle Component Analysis vs. Cholesky Decomposition for MonteCarlo

Let's assume we have a portfolio containing large number (~500) of risk factors. We want to simulate the portfolio dynamics. PCA based simulation would be faster as we can reduce the dimensionality. ...
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### 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, ...
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### 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 ...
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378 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 ...
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### Correlation Sensitivity

Suppose I have 2 stocks $S_{1}$ and $S_{2}$: \begin{align} & dS_{1}=rS_{1}dt+\sigma_{1}S_{1}dB_{1}\\ & dS_{2}=rS_{2}dt+\sigma_{2}S_{2}dB_{2}\\ & dB_{1}dB_{2}=\rho dt \end{align} Then I ...
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401 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 ...
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478 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 ...