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

learn more… | top users | synonyms

0
votes
2answers
39 views

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 ...
2
votes
1answer
102 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 ...
6
votes
0answers
137 views

Applications of distance correlation

This question mentions distance correlation. Where has this concept been applied to financial data and provided new insight? Do you know any examples or references?
6
votes
0answers
230 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 ...
4
votes
0answers
173 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
250 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
0answers
73 views

What is the most stable, non-trivial dependence structure in finance?

The highest rated answer to the question on What concepts are the most dangerous ones in quantitative finance work? is this one: Correlation Correlations are notoriously unstable in ...
2
votes
0answers
50 views

serial correlation, Fama MacBeth (1973) procedure incorporating momentum

I have a question regarding the use of the Fama-MacBeth (1973) procedure on panel data. I am investigating the cross sectional determinants of expected REIT return following the procedure from: Chui, ...
2
votes
0answers
30 views

In May of 2005, several large hedge funds had speculative positions in CDO tranches

These hedge funds were forced into bankruptcy. This was due to: the correct answer is: Long Mezzanine and Short Equity Tranche position when correlation of Mezzanine tranche decreased. Can anyone ...
2
votes
0answers
74 views

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 ...
2
votes
0answers
164 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 ...
2
votes
0answers
190 views

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. ...
1
vote
0answers
33 views

Account for empirical relationship between signal and market data

I have two monthly time series : one is a 'signal', on which I will base my decision to buy or short-sell, and the second one is the time serie of a given asset's price. I have implemented this ...
1
vote
0answers
57 views

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 ...
1
vote
0answers
40 views

Good broad review of network modeling for quant finance?

Trying to find some good review of agent-based models for quantitative finance, covering opinion dynamics, correlated behavior, etc. Are there any articles or books that cover major advances in these ...
1
vote
0answers
99 views

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 ...
1
vote
0answers
50 views

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 ...
1
vote
0answers
45 views

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 ...
1
vote
0answers
371 views

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: $y_{t}=\beta_{t}x_{t}+\epsilon_{t}$. ...
1
vote
0answers
90 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 ...
0
votes
0answers
30 views

Adding negative EV position to portfolio for diversification?

Say I have a portfolio of expected return $10%$ and volatility $20%%. If I have another asset that is either one of: Negatively correlated Positively correlated Uncorrelated With negative expected ...
0
votes
0answers
18 views

Correlation coefficient for different functions

Can somebody explain the correlation coefficient values for the following set of functions $x and $y? -Independent Functions -Asymptotically Dependent Functions -Marginal Functions -Normally ...
0
votes
0answers
37 views

Exponentially weighted random matrix - which variance should I use?

I am currently playing around with exponentially weighted correlation matrices and filtering based on Random Matrix Theory. However, there is one thing I am not really sure about: In the equation ...
0
votes
0answers
46 views

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 ...
0
votes
0answers
15 views

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 ...
0
votes
0answers
18 views

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) ...
0
votes
0answers
32 views

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 ...
0
votes
0answers
29 views

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-...
0
votes
0answers
37 views

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, ...
0
votes
0answers
21 views

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: ...
0
votes
0answers
83 views

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 ...
0
votes
0answers
441 views

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 ...