# Tag Info

## New answers tagged correlation

0

One easy way to cross-check that is to compute option implied correlations. Those correlations are model free and only depend on the current day option prices and they are indeed stable. For a nice article on computing option implied correlations check Vilkov's website he has several articles discussing option implied correlations. ...

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If you're in Excel, get the returns of both portfolios into 2 columns, matched up by time. The "correl()" function will get you the correlation coefficient.

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You will need the covariance matrix to calculate this. Say you have a collection of $n$ assets. The value of asset $i$ is represented by the random variable $X_i$ and the corresponding portfolio weight is are $w_i$, and $v_i$ for the two portfolios. The correlation between the two portfolios is: $$\frac{\sigma(w^TX,v^TX)}{\sqrt{(w^T\Sigma w)(v^T\Sigma ... 1 The \lambda value used in the original paper is arbitrary, but you can estimate that by assuming (in the simplest case) 2 assets and running the following model: \sigma^2_{12,t+1} = \lambda$$*$$\sigma^2_{12,t-1}$$+$$(1-\lambda)$$r_{1,t}$$*$$r_{2,t}$; given$r_{1,t}$and$r_{2,t}\$ respectively as the returns for the asset 1 and 2 and ...

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