New answers tagged correlation
to answer my own question, there's no popular model for the question, that $dS/S=\mu(t)dt+\sigma(t)dW$, and $\sigma(t)$ is correlated with $\mu(t)$. the general framework should be stochastic volatility model, but need do the extension on my own.
Correlations between what? Correlations between stock A and another stock B - relative value arbitrage - not sure if small correlations will help here. Correlations between stock A and its future stock return Ra - its called Information Coefficient. Try Fundamental Law of Active Management and many similar web info on Fundamental Law for more information. ...
it is based on Kelly criterion. mentioned in one of stackexchange posts here .
Here it is: "Rebonato, R., Jackel, P. The most general methodology to create a valid correlation matrix for risk management and option pricing purposes." Recall: a covariance matrix will be the same as a correlation matrix if scale is removed. I used this method for ensuring positive definite correlations matrices.
This is a very good question. In part, you can find a comparison by going to randommatrixportfolios.com and looking at the wealth charts for e.g. the Dow 30 portfolios, say, the 2-year data. You will note that portfolios based regressing the log-returns of price on the "signal" PCs (principal components) based on the Marcenko-Pastur noise cutoff and using ...
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