Hot answers tagged correlation-matrix
8
For years, I performed this brute-force search daily on my universe of tradable stocks and futures. It is a waste of time. If your computer discovers that hog futures and MSFT are cointegrated, for example, do you really care? I would never trade that pair. There is no economic connection between hogs and Microsoft, so I must assume that the reported, small ...
7
Yes, you need Cholesky factorization.
You can find the general idea here:
http://www.goddardconsulting.ca/option-pricing-monte-carlo-basket.html
Plus the implementation in MATLAB here:
http://www.goddardconsulting.ca/matlab-monte-carlo-assetpaths-corr.html
The code in general should be easily translatable. The only difficulty is the Cholesky factorization ...
6
Theoretically, the answer to the question is yes, a correlation matrix for potential pairs trades can be computed in $O\left((n^2t)^{(\omega+\epsilon)/3}\right)$ time, for any $\epsilon > 0$, where $\omega < 2.38$ is the so-called exponent of matrix multiplication.
However, these algorithms have a reputation for having a very large constant factor ...
2
I am not an expert in this field, but it would be best to consider a full multivariate GARCH model. This paper by Engle and Sheppard should be a good start.
I think the constant correlation matrix approach is covered to a certain extent too. I hope this helps.
2
I had to answer because of your name, and becaue I deal with portfolio optimization often.
In my world of equities correlation does matter a lot. If one follows the thoughts e.g. here then it matters most.
I deal with minimum-variance construction (no expected return, of course some constraints on the weights) and there I often see positions that come ...
2
See "Some hypothesis tests for the covariance matrix when the dimension is large compared to the sample size" by Ledoit and Wolf.
http://projecteuclid.org/DPubS?service=UI&version=1.0&verb=Display&handle=euclid.aos/1031689018
1
You will probably be interested in the following papers:
Ang & Chen: Asymmetric Correlations of Equity Portfolios
Longin & Solnik: Extreme Correlation of International Equity Markets
Hong et al: Asymmetric Correlation of Stock Returns:
Statistical Tests and Economic Evaluation
The last paper goes further into exploring the implications of ...
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