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seen Jun 21 at 22:14

Dec
13
comment How to estimate the covariance of an index with a basket of stocks?
Look at the bilinearity property of the covariance function.
Dec
13
comment Empirical or theoretical quant insights that have shaped your thinking?
Granted, there was a large increase to 0.3 average DCC correlation during the GFC and Eurozone crisis.
Dec
13
comment Empirical or theoretical quant insights that have shaped your thinking?
On your last point, have you read Forbes & Rigobon [Journal of Finance, 2002]? Based on my reading of the contagion literature there is not consensus that correlations increase. The authors find no evidence for increases in correlations (however there is accumulating recent evidence that this does occur). This is the case because the heterscedasticity can bias the Pearson estimates upwards. Also, I looked at 50 indices and their associated exchange rates and the DCC(1,1) correlations between them were only 0.1 on average over the 2001 dot-com crash.
Dec
13
comment Empirical or theoretical quant insights that have shaped your thinking?
Brilliant. Can I ask (i) How can the distress of one firm be diversified away? To me that seems similar to saying that the small size of a firm can be diversified away because its size is firm specific (even though size is one of the most well established priced risks/anomalies). (ii) I think returns are stationary. Whenever I do adf or pp testing over a large number of return series what I find is consistent with a 5% false rejection rate by chance.
Dec
13
comment Cloning Return Streams
Reliable 75%+ correlation is definitely not possible for the vast majority of hedge fund types.
Dec
13
comment George Soros models
@PatrickBurns That is a really great hypothesis! However, a thorough explanation of the hypothesis would include a discussion of the role of changing fundamentals as the core driver of this phenomenon.
Dec
12
answered Stock Price Behavior and GARCH
Dec
12
comment Stock Price Behavior and GARCH
This is the Euler-Marayama discretization. There are better ones (such as Milstein).
Dec
12
comment Do markets typically fall fast, and rise slowly
For this interested in @PatrickBurns comment about people following the crowd, you may be interested in the herding literature which finds that this does in fact happen to some non-trivial extent in most countries.
Dec
12
comment Estimating two normal random numbers with one equation
Maybe this will help. If we have that $\langle W_1,W_2\rangle = \rho t$ then we can write that $dW_2(t) = \rho dW_1(t) + \sqrt{1-\rho^2}dW_1^\perp (t)$, where $dW_1^\perp(t)$ is a perpendicular brownian motion.
Dec
12
answered Missing step in stock price movement equations
Dec
10
comment GJR-GARCH Model In R
rugarch really is fantastic.
Dec
9
asked Should I use GARCH volatility or standard deviation in cross-sectional regression?
Dec
7
comment Taking into account the correlation in Barrier options on a Basket
I think that $\langle dW_t^{i},dW_{t}^{j}\rangle=\rho_{ij}dt$
Dec
7
comment Who cares about autocorrelation?
Of course publications gloss over this, as it's considered general knowledge among the readership of the paper.
Dec
7
accepted Why are regressors squared and not ^1.5 or ^2.2 or ^2.5?
Dec
7
comment Using rolling returns in a multivariate linear regression?
Have a look at the several serial correlation robust bootstrap estimators.
Dec
7
comment Modeling interest rates with correlation
What short rate model is this that multiplies $r$ with drift and $r$ with diffusion? What probability measure is this specified under?
Dec
6
comment Why are regressors squared and not ^1.5 or ^2.2 or ^2.5?
Very nice response. Could you address my reply to @pat in the comments section? Then I will accept the answer.
Dec
5
comment What concepts are the most dangerous ones in quantitative finance work?
Could you please elaborate on what you mean by "vanishes". There is no consensus (yet) in the contagion literature as to whether correlations are stable or increase during crises. When accounting for the bias in correlation coefficients caused by increased return variance during crises, Forbes & Rigobon (2002) show that correlations are stable during crises. Some recent evidence shows that correlations tend to increase during crises. But I've never seen any evidence that it vanishes. EDIT:Actually this is just for index level.Perhaps with other asset classes or constituent level you're right.