Questions tagged [correlation]

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

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85 views

Select top $n$ most correlated assets in universe

I know this questions is a bit ambiguous, but I guess that's natural. To put it simply: I have a universe of around 600 stocks. How do I find the top $n$ "most correlated" assets? At the ...
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How to decide which sentiment analyzer is the better model?

Assume one has trained different sentiment analysis models that assigns sentiment scores to the financial news or documents. How would one should approach testing the different models and decide which ...
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Marginal contribution to tracking error in excel

Given a portfolio of 10 funds and a benchmark of 10 indices, I am looking to calculate the marginal contribution to tracking error. My confusion is about what excess returns to use, should this be ...
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56 views

Joint probability of default

Had a couple of questions from Jorion's FRM book (5th edition, page 438, Table 18.2 shown below). The book has a very stylized example as shown in the table below. The example shows how to calculate ...
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Autocall- equity/funding correlation

Could someone explain how the price of an autocall changes with equity/funding correlation, please? I have sometimes heard that the trader who sells an autocall is long equity/funding correlation but ...
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56 views

How to calculate if a portfolio has diversification

I writing a paper and wanted to know the best way, method or theory to know if a portfolio is diversified. To give you some context, I wanted to know if whether putting Bitcoin into a portfolio with ...
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44 views

Running an autocorrelation with blanks?

How does one run an autocorrelation when there are blanks in the dataset? I have a dataset of interest rates and I am plotting day x vs day x-1. I’m unable to run a correlation in Excel if there are ...
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106 views

Correlation for Trading vs. Risk Management

Assume a portfolio that contains some asset A and that I am contemplating hedging my delta in A by taking a position in asset B. I would determine how much of B to buy/sell based on the linear ...
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127 views

MSCI World and MSCI World future: low correlation, how come?

Noticed today that hedging the MSCI World (NTR, div reinvested) by shorting it's very own future (same underlying index, also NTR) leaves a lot of active risk. This is explained by low correlation ...
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Calculating the downside correlation between two time series

If I have two financial time series and I want to calculate the correlation between them when series1 gives me a negative returns, would that be as simple as picking only those periods where series1 ...
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Impact of correlation on greeks of a multi-underlying autocallable product

Please could someone explain how the greeks (especially the delta) of a multi-underlying autocallable product (i.e. an autocall on a basket) change when the correlation of the underlyings fluctuates? ...
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Covariance Matrix for asset returns [closed]

Hey guys I'm pretty new here, not sure how to code my question so I'll include a picture reference instead. I'm a bit confused on how the standard deviation of F (commodity price) would affect the ...
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does anybody know a package for the estimation in python of multivariate garch model? [duplicate]

is there any package in python for the estimation of multivariate garch models? (bekk, dcc) i tried with the package mgarch but it provides only a few commands and wanted to know if there are some ...
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Gaussian Copulas: My Marginal Distribution Includes Negatives but My Copula is Non-Negative?

Attempting Copula in R for Stock Returns, Bond Returns, and Inflation Rates. This is my first attempt with Copulas but I have looked many places and cannot determine what I'm doing wrong. My Marginal ...
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244 views

What is the difference between a volatility smile and a correlation smile?

I understand to plot correlation and volatility smiles, we have to plot the implied normal vol vs strike and observe a U-shaped relationship. How are these smiles different? Does a vol smile plotted ...
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Generalized Black Scholes PDE in a Two Factor model

I'm reading the book of Clewlow and Strickland on Energy derivatives. In the section about the two-factor model, an equation, similar to B&S PDE is presented, but the proof is not presented. Spot ...
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If I have 2 uncorrelated currencies, why is the volatility of their product higher than either of the volatilities? (better explanation inside)

Let's say we have 3 currencies: EUR/USD USD/GBP EUR/GBP For a minute let's assume that we calculated the EUR/USD-USD/GBP correlation for the last N days and the result was 0.0 (I know this is not ...
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132 views

Correlation Matrix - NaN Values

I am trying to create a Correlation Matrix of one particular industry (in the consumer goods sector) with around 15 securities across multiple stock exchanges for the year 2020. However, I have a lot ...
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Bug found in Optimal Number of Clusters algorithm - from de Prado and Lewis (2018)

I believe I have found a bug in Optimal Number of Clusters (ONC) from the paper "Detection of False Investment Strategies Using Unsupervised Learning Methods". ...
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Correlation between assets used for valuing multi-asset options (Rainbow options, basket options etc.)

Is there an equivalent to implied volatility used when it comes to modelling correlation in option valuation for multi asset options such as rainbow options (best-of/worst-of calls/put), or is the ...
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Is “Information Coefficient” correlation or rank correlation?

From the textbook, information coefficient (IC) is a measure of the depth of an active manager’s skill. On a more formal basis, IC measures the “correlation” between actual returns and those predicted ...
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Value the claim $(X-K)1_{X>K}1_{L<Y<U}$

Consider two correlated assets $X$ and $Y$ with marginals $f_X$ and $f_Y$ and linear correlation coefficient $\rho$. Assume a Gaussian copula, $C_{X,Y}(x,y,\rho)$, can approximate the joint CDF well ...
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Simulating correlated Geometric Brownian Motion with lag

I know that it is possible to simulate two correlated GBM in e.g. Matlab (Generating Correlated Asset Paths in MATLAB) based on cholesky decomposition. However, they take as input the correlation ...
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Credit VaR for this portfolio assuming no default correlation and no recovery?

I am trying to estimate the Credit VaR for a portfolio of two risky bonds. The Credit VaR is defined as the maximum unexpected loss at a confidence level of 99.9% over a one-month horizon. Assuming ...
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Correlation of financial returns: how to account for different frequencies?

If you had to calculate a correlation between two financial return time-series, on what frequency would it make sense to do so? Yearly returns? Monthly? Weekly? Daily? What is the norm here? The issue ...
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Correlation of two strategy's returns, is it a good standard to select strategies?

Let say I have two strategies, A and B. Historically, when the portfolio value of strategy A moves up, then that of portfolio B moves up. Same in the down case. Then, we can say both strategies are ...
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How do you adapt Marcenko-Pastur for EWMA correlation matrix

Hi to denoise the correlation matrix you can use the marcenko pastur distribution. Even without getting into its detail,. its easy, you just use t/n to get the lambda value under which you will ...
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Hierarchical copula vs. vine copula

Vine copulas are a sequential cascade of bivariate copulas meant to capture the hierarchical structure in the dependence structure of random variables. How does this relate or differ from the concept ...
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60 views

Correlation between mean-variance efficient portfolios

If the covariance solution between the returns series of the minimum-variance portfolio ($A$) and any other portfolio along the efficient frontier ($B$) is $$Cov_{A, B} = \frac{1}{\mathbf{1}^T\mathbf{\...
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Simulating correlated Geometric Brownian Motion in Python

I want to simulate two correlated Geometric Brownian Motion processes in Python. I found an implementation from Matlab (https://www.goddardconsulting.ca/matlab-monte-carlo-assetpaths-corr.html) and ...
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Simulating two correlated time series using GBM [duplicate]

My situation is the following: I have two time series TS1 and TS2, whereas TS1 is a stock price. According to literature, TS2 is positively correlated to TS1. Furthermore, since TS1 is a stock price, ...
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Does the $t$-copula or Clayton copula capture the dependence structure of empirical returns better?

Which copula captures the dependence structure of empirical asset returns better? the $t$-copula, which has symmetric tail dependence, or the Clayton copula, which has asymmetric tail dependence, and ...
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Correlation vs. dependence in finance

I found an example that shows how two uncorrelated random variables can be dependent: a normally distributed variable $X$ is not correlated with its square $Y=X^2$. What can be $X$ and what can be $Y$ ...
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172 views

Monte Carlo simulations of correlated stocks by Geometric Brownian motion

I am trying to simulate using a Geometric Brownian Motion process three autocorrelated stocks. In particular, I need to simulate three different matrices with 1000 scenarios each using a Monte Carlo ...
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Correlation sensitivity in multivariate $t$-copula for portfolio VaR of electricity futures using Kendall's tau-$b$ correlation matrix

My t-copula model captures the daily dollar returns of a portfolio of approximately 400 assets. I am curious if there's a generally accepted way to quantify the sensitivity of portfolio movements with ...
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127 views

Covariance of mean-reverting Vasicek process?

I am dealing with a mean-reverting Vasicek process defined as: \begin{equation} S_t = S_0 e^{-at} + b(1-e^{(-at)}) + \sigma e^{(-at)} \int_{0}^{t} e^{(-as)} \ W_t \end{equation} I want to ...
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What is the appropriate transform before calculating the correlation between two assets?

When calculating the correlation between two assets, what is the appropriate transform before taking the correlation? PChg = (P2/P1) - 1.0 LChg = Log(P2) - Log(P1) x = Log(P2) where P2 is the newest ...
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Nasdaq and HML factor positive coefficient

I am using the HML factor from Fama French’s website and have always assumed that a negative coefficient indicates that the portfolio has a tilt towards growth stocks. When I however perform a simple ...
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Are the correlations of multivariate stock prices preserved when converted to multivariate returns?

If data for multiple stock prices has a specific correlation matrix, is the correlation matrix preserved when those prices are converted to multivariate log-differenced returns?
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Should portfolios have zero or negative correlation between assets? [closed]

Is it more optimal to have a portfolio whose assets are negatively correlated? (I am not requiring all assets to be negatively correlated in this case, nor (-1) perfectly negative correlation either. ...
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Why does the likelihood of corner solutions in portfolios increase as the number of assets grows?

A three- asset portfolio doesn't seem prone to generating corner solutions, which are very high allocations to one of the assets and $0$ to the others. Instead, when the number of assets is low, these ...
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Which portfolio is more “diversified”: the $\frac{1}{N}$, the MDP or the max decorrelation?

Equally-weighted portfolio: weights each asset the same $w_i = 1/N$ Maximum diversification portfolio: maximizes the ratio, $\frac{w' \sigma}{\sqrt{w' \Sigma w}}$ Maximum decorrelation portfolio: ...
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138 views

Non-linear correlation (co-dependence) and the efficient frontier

The graph below shows how the efficient frontier for 2 assets bends into a sharp bisection as correlation decreases from $1$ to $-1$, with $\rho=-1$ being the most diversified, and highly unattainable ...
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113 views

comparing volatility and correlation over time

I'm trying to figure out if some emerging markets change over time. First of all I am going to check for changes in volatility. What would be a good method to do this. And do you suggest comparing ...
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How to annualize the correlation matrix?

If asset returns are daily, and the asset return covariance matrix, $\Sigma$, is annualized by $\Sigma \times 252$, do I also multiply the correlation matrix by 252 to annualize it?
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528 views

How can beta be negative? [closed]

I've been reading about the security market line and the definition of beta as $$\beta_i = \frac{Cov(R_i, R_m)}{Var(R_m)} $$ for any asset (doesn't have to be an efficient portfolio), and have read ...
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References for deep understanding of correlation matrices

Can anyone suggest some references for learning as much as possible (and in detail!) about correlation matrixes? In particular, would be great to have (among others) covered: algebraic and ...
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Modelling dependance between the two uncorrelated variables using copulas

Are copulas good tool to model the dependence between the two uncorrelated variables. I have X and Y datasets with 260 data points each with Pearson's correlation=-0.06 and Kendall rank correlation=0....
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Sharpe from signal to daily return correlation

A few years back in an interview I remember being asked to derive the Sharpe ratio from the correlation between a pre-open daily signal and the open-close returns. I think you had to make some ...
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Ranking assets by covariance vs correlation

After every change in portfolio (i.e. every trade), I need to calculate a price for each asset in my portfolio. But the calculator is slow. So I want to order the sequence of price updates, from the ...

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