# Questions tagged [correlation]

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

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I am trying to understand the effect of correlation between bid price and ask size with realized volatility (called targe_vol). Similarly, correlation between ask price and bid size with realized ...
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### Comparing implied volatility in 2 different correlated assets

The general idea here is that I am trying to compare the volatility surface of two different financial assets whose prices and returns time series exhibit a strong relationship/correlation : The ...
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### Admissible values for non diagonal elements of correlation matrix

Preparing for possible job market interview questions I was reading some questions on the site. Regarding this question with its solution interview questions Question Let $\mathbf{C}$ be a $n\times n$...
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### How to construct a delta-neutral portfolio containing stocks using correlations?

I’m aware of the mean-variance framework where we construct a portfolio such that we attempt to minimise the variance and maximise returns. What if instead we’re in a scenario where the main goal is ...
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### PCA factors not uncorrelated

I ran into an interesting case recently. I am trying to construct a set of uncorrelated factors for a statistical factor model. I have started with picking a certain amount of assets (indices) which I ...
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### short-term statistical factor models for equities with different trading hours

I wonder if there are existing theory/literature about estimating a short-term statistical factor models for equities with different trading hours. For example if we are estimating a universe with US ...
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### Why didn't LMT stock spike and NOC dip in 1990 due to the F-22 raptor competition?

Disclaimer, I am a newbie at finance! I have been tracking the NOC and LMT stock prices and I have a few questions. Both companies seem to be moving together in terms of stock prices. I would expect ...
1 vote
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### Correlation between a stock and the index without the stock

The weight of stock i in index m is w. The returns are, respectively, r(i) and r(m). I know the volatility s(i) of i, the volatility s(m) of m and the correlation rho(i, m) between i and m. The index ...
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### How do I measure the "dispersions" of a group of stock returns

I have $n$ stock return time series $X_1, X_2, ... X_n$. I want to measure how much they have "dispersed" over time. i.e. are they moving "more together" in 2023, comparing to 2022....
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### RiskMetrics Half-Life and Decay Factor Settings

I have been reading about the RiskMetrics methodology. I read that RiskMetrics recommend a lambda of 0.94 for daily data and 0.97 for monthly data. I would like to convert these numbers to half-lives. ...
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### correlation of 1/X [closed]

My question is the following. If the correlation between the log-returns of X and Y is rho, what would be the correlation between the log returns of 1/X and Y ? Thanks for your answers.
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### hedging out of cross-ccy vol risk using direct ccy options [closed]

Lets suppose a G10 FX vol market-maker starts out with a flat book. During the day, the market-maker bought a EURUSD 1 week ATM straddle from one client while sold USDJPY 1 week ATM straddle from ...
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### Alternative To Granger Causality?

Are there any other mathematical tests besides Granger that quants use to determine casual relations between two time series? If so what are they? How about convergent cross mapping? Thanks
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### Correlation with Differ Units of Measurement [closed]

I was wondering how to accurately get the correlation between a variable of percent change return and a variable of dollar change or basis points. Should I standardize both variables or will that lose ...
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### Correlation between CDS return relevance

I see that there is much literature that uses the correlation notion in the equity returns to construct a graph or look into how they are related to one another. If we want to extend this to Credit ...
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### Mean-variance framework with endogenous correlations

In most mean-variance frameworks I have seen, once we clear markets in the model, it determines asset prices (and returns). However, all of these frameworks assume that the correlation matrix of the ...
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### Cholesky decomposition reduces volatility of simulated Wiener Process / Brownian Motions

I am trying to simulate $n$ correlated geometric brownian motions (GBM) given a specified correlation matrix $\Sigma$ by following this procedure which uses Cholesky decomposition. However, when I ...
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### Techniques for proxying time series / stock prices

What are some good techniques for proxying time series? My purpose is for risk management / modelling and I would like proxy to missing series. Given that I also have to account for volatility, ...
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### Local volatility implied spot vol correlation

I have a question about local volatility models. In a lot of articles it is stated that the implied spot vol correlation of this model is -1 and we usually compare this with stochastic volatility ...
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### Simulating Correlation (but sample correlation is always too low)

I am trying to simulate correlation in order to price a correlation swap (via Monte-Carlo). For simplicity, let's assume we have 2 assets, and everything is correlated with $\rho$, and there is no ...
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### How to optimize two highly correlated risky assets?

Suppose you have two highly correlated risky assets. Correlation coefficient: 0.9 Volatility: Asset 1 price varies 2.5% /day Asset 2 price varies 5% / day What can be done to do reduce the risk and ...
1 vote
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### What's the right autocorrelation formula?

I'm trying to see the influence of autocorrelation in my processes and to do so I have to compute it, however it seems to be hard to find a coherent formula over the web. I found pretty much two ...
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### Correlation between fundamental and market data

I got hold of a data set which contains fundamental data like analyst recommendations/revisions (consensus only) and I am trying to come up with an idea of how this could be used as a trading signal ...
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### Correlation Size

If I want to make an argument that two stocks are reasonably correlated: Q1. What is the most credible source (most cited) of correlation size for stock return pairs? What is a reasonable small, ...
1 vote
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### Adjusting a correlation matrix based on one changed correlation

I have a correlation matrix that is created by historical asset returns, but I want to see how changing one of those correlations would affect the rest of the correlation matrix. How would I go ...
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### Does correlation of stocks represent magnitude?

When calculating the correlation between two stocks I get an 85% correlation. Does this indicate anything about the amount the stocks are going up (so if one goes up 10% so does the other) or just ...
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