Questions tagged [correlation]

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

Filter by
Sorted by
Tagged with
2
votes
1answer
80 views

Kelly Criterion for Multiple Simultaneous Correlated Bets

I am looking for an equation for the optimal fractional bet sizing for N number of simultaneous correlated bets. I am looking specifically for an equation for binary bets, but an equation for bets ...
0
votes
0answers
20 views

Where to find retail trading volume data?

I have plans to work on a paper to study a possible correlation between fluctuations (volatility) in the European and American markets with retail trading activity, either dollar and/or ticket volume. ...
0
votes
1answer
52 views

How to simulate correlated stock prices (not returns)

Suppose we have two stocks following GBMs. Drift and volatility are calculated based on historical data. Furthermore the stocks are assumed to be correlated (i.e. they move together, if stock 1 goes ...
0
votes
1answer
42 views

GBM drift when simulating correlation betwenn GBM with Cholesky Decomposition

I am currently trying to simulate correlated GBM paths and I found the Cholesky Composition for it. From my understanding, the Cholesky Decomposition can be used to create correlated random variables ...
0
votes
0answers
57 views

Infill lower frequency data: Brownian Bridge

Given monthly returns data, I would like to infill those to get daily returns. Roughly estimates imply that annual volatility is about 1.5x of SPY. One option that came up in my initial research was ...
2
votes
0answers
65 views

Examining the dependence of the fractional difference parameter in ARFIMA(0,d,0) vs bar size for Realized Volatility

Realized volatility is a long-memory process and so I fitted an ARFIMA(0,d,0) to log(RV15) where RV15 is realized volatility calculated from 15-min bars. I proceeded to examine how changing the bar ...
2
votes
1answer
128 views

Information Coefficient (IC) Formulae Differences

I am learning about Fundamental Law of Active Management, and there seems to be two different Information Coefficient (IC) formulae presented. Though I myself am not a CFA candidate, these appear to ...
1
vote
1answer
78 views

How to properly calculate the average across multiple correlations?

I'm trying to obtain an average across 3 correlations. Using Python, I obtain these correlations with: corr = df.apply(lambda s: df.corrwith(s)) which outputs: <...
0
votes
2answers
108 views

Beginner's resources on copulas and impact of correlation on loan defaults?

I'm hoping this question is not too banal or off-topic for this forum. Could you please help me understand / point me towards some resources on the impact of correlation on loan defaults? First ...
0
votes
1answer
86 views

Correlation between corporate bonds and treasury

What aspects decide the correlation between US corporate bonds and US treasury ? I was told that some corporate bonds are more sensitive to treasury than others. Sectors or maturity?
3
votes
2answers
190 views

Find k of n assets that "minimize" the correlation matrix

I'm trying to find an efficient way to select $k$ from $n$ risky assets that are the least correlated with each other. I know that I can perform a brute-force search of all $k$-sized combinations of ...
1
vote
0answers
63 views

How to extract informative value from correlations of assets? Subadditivity of correlation calculation an issue

I was reading Nassim Taleb's Paper: Fooled by Correlation and found it very informative. I had always struggled with finding value in correlation in Finance, especially seeing a lot of bad ...
-2
votes
1answer
40 views

Hedge 3 securities against 3 other securities

I have a portfolio of 6 securities, 3 long 3 short. I need to hedge them against each other so directional exposure = 0. How would I decide how to weight each security? Is there a model to do this?
0
votes
0answers
36 views

How to use Partial Correlations in Portfolio Construction

In learning more about precision matrices and partial correlations, I've begun wondering (very generally) how these statistical measurements could be used in portfolio construction. More broadly, can ...
3
votes
0answers
138 views

Contribution to Mahalanobis Distance

I am using Mahalanobis Distance to measure abnormal behavior within a portfolio consisting of a handful of general asset types, and am trying to figure out how to decompose this measurement into ...
0
votes
1answer
141 views

Correlation between brownian motions and Cholesky decomposition [closed]

I know it is a pretty basic question (I'm new at Quantitative Finance), but what's the logic behind the Brownian Motions correlation? The expression is: Where is this formula coming from? On the ...
0
votes
0answers
25 views

Appropriate time-lag for financial correlation analysis and how to address different currency exchange rate dates for dep. and indep. variables?

Quick introduction I am supposed to use a multiple linear regression model to determine the correlation between the market capitalization of a subset of european companies (primarily in Switzerland, ...
0
votes
1answer
77 views

Sensitivity of correlation swaps to stochastic volatility

Are correlation swaps sensitive to stochastic volatility? Can you please justify from a theoretical point of view?
-1
votes
2answers
170 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 ...
0
votes
0answers
24 views

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 ...
0
votes
0answers
95 views

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 ...
1
vote
1answer
68 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 ...
2
votes
1answer
104 views

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 ...
0
votes
0answers
61 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 ...
1
vote
2answers
54 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 ...
3
votes
1answer
126 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 ...
3
votes
1answer
140 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 ...
0
votes
0answers
49 views

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 ...
0
votes
1answer
83 views

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? ...
-1
votes
1answer
65 views

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 ...
0
votes
0answers
34 views

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 ...
1
vote
0answers
36 views

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 ...
2
votes
1answer
273 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 ...
1
vote
0answers
38 views

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 ...
0
votes
2answers
96 views

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 ...
0
votes
1answer
209 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 ...
0
votes
0answers
216 views

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". ...
1
vote
1answer
141 views

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 ...
1
vote
0answers
80 views

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 ...
0
votes
0answers
30 views

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 ...
1
vote
1answer
136 views

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 ...
0
votes
0answers
41 views

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 ...
1
vote
0answers
36 views

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 ...
0
votes
0answers
31 views

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 ...
3
votes
0answers
73 views

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 ...
1
vote
0answers
48 views

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 ...
0
votes
1answer
71 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{\...
2
votes
0answers
459 views

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 ...
0
votes
0answers
45 views

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, ...
0
votes
0answers
55 views

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 ...

1
2 3 4 5
7