# Questions tagged [correlation]

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

95 questions with no upvoted or accepted answers
Filter by
Sorted by
Tagged with
297 views

### Applications of distance correlation

This question mentions distance correlation. Where has this concept been applied to financial data and provided new insight? Do you know any examples or references?
517 views

### Stress testing covariance

Going one level beyond stressed scenarios, to parameters e.g. for a VaR measure: what are the most common approaches for stressing a covariance/correlation matrix, especially taking portfolio exposure ...
530 views

### Taking into account the correlation in Barrier options on a Basket

In a Barrier option (where the contract cancels when the underlying hits the barrier) I succesfully found the way to compute the probability of a single underlying touching the barrier (with constant ...
101 views

### mixing fractional Brownian motions

Given two Brownian motions $W_t^1, W_t^2$, we can have them correlated by $$W_t^1 = \rho W_t^2+\sqrt{1-\rho^2}Z_t$$ where $W_t^{2}$ and $Z_t$ are independent of each other. My question then: is there ...
164 views

### Inflation/Rates Correlation

I've been looking into a short piece of maths a colleague has written on pricing inflation with payment delays, and was hoping someone could confirm whether my understanding is correct, or if my ...
251 views

### Rolling window Kendall's tau against APARCH(1,1) correlation

Assume you want to forecast the correlation matrix of a stocks' basket (say 15 ~ 20 stocks from different sectors); assume you need to forecast at $T$ days because you will use the forecast ouput with ...
534 views

### Correlation sensitivity of Rainbow options

I read from various sources (eg. Exotic Options and Hybrids, M. Bouzoubaa) that the correlation sensitivity of Rainbow options (say a call price on a basket made of 50% of the best stock, 20% of the ...
167 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 ...
94 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 ...
1k 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 ...
82 views

### 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 ...
54 views

### Joint Distribution of Correlated Variables with Markov Switching

I am modeling a portfolio of correlated assets whose lack of liquidity can be reasonably described by a Markov-switching model. That is, not only is movement size among assets correlated, but so is ...
113 views

Are there any robust / non-parametric results for pure stochastic volatility models, in terms of bounds or preferably accurate approximation, for the implied volatility skew $\partial IV(k) / \partial ... 3 votes 0 answers 133 views ### Change of measure for BGM (LMM) Model I've been checking the demos for BGM (LFM) forward rate model. Here's a short reminder to help you follow: Now, take the following $$\frac{dL_j(t)}{L_j(t)} = \sigma_j. dW^j(t) = \mu_{ij} dt + \... 3 votes 0 answers 139 views ### Detecting leading stocks using lag correlation I am working on a project to find leading stocks in a stock market by using lag correlation. Say I want to compare 2 stocks, X and Y, and I have the time series of stock prices. Assume that the ... 3 votes 0 answers 304 views ### Implied correlation Have I understood it correctly if the standard way to calculate implied correlation is the Gaussian Copula model where we: Calibrate the underlying portfolio to get a homogenous default probability ... 3 votes 0 answers 371 views ### Correlation between idiosyncratic residuals and forward returns The classic mean-reversion strategy is to calculate an "expected return" (alpha) by computing the raw return for each security and then remove the part which you think is market driven. Statistically ... 2 votes 0 answers 112 views ### 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 ... 2 votes 0 answers 77 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 0 answers 60 views ### 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 ... 2 votes 0 answers 159 views ### 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 ... 2 votes 0 answers 36 views ### Tools related to Granger Causality I would like to know if there are some tools that can measure that one time series is "faster" than the second one. I talk about really similar time series related to high frequency trading (hundreds ... 2 votes 0 answers 88 views ### Do you have any examples of 2 assets that are non linearly correlated? And any models that calculate portfolio risk based on non-linear correlation? Do you have any examples of 2 assets that are non linearly correlated? And any models that calculate portfolio risk based on non-linear correlation? 2 votes 0 answers 132 views ### Bivariate risk neutral distribution through copula I want to build a bivariate risk-neutral distribution from two liquid assets (A and B) through the use of a copula. As A and B are liquid, I have the marginal distributions from the market. All I have ... 2 votes 0 answers 356 views ### CDO Implied correlation: what for? Reading about CDOs and calibration to find the implied correlation, I came up with the following question. Suppose we are pricing a CDO over a pool of N=125 names, using the usual Gaussian copula ... 2 votes 0 answers 92 views ### Portfolio of single stock short put options: which correlation structure preferrable? Let's say you want to have a equally-weighted (in terms of the option price) portfolio of short put options on various stocks with the same maturity. Running Monte-Carlo simulations, it seems that ... 2 votes 0 answers 297 views ### serial correlation, Fama MacBeth (1973) procedure incorporating momentum I have a question regarding the use of the Fama-MacBeth (1973) procedure on panel data. I am investigating the cross sectional determinants of expected REIT return following the procedure from: Chui, ... 2 votes 0 answers 109 views ### In May of 2005, several large hedge funds had speculative positions in CDO tranches These hedge funds were forced into bankruptcy. This was due to: the correct answer is: Long Mezzanine and Short Equity Tranche position when correlation of Mezzanine tranche decreased. Can anyone ... 2 votes 0 answers 346 views ### Time-Varying Copulas (GAUSS) Could anyone suggest me how to begin with Time-varying Copulas or Stochastic Copulas? I'm looking for the GAUSS code, however it seems there are only MATLAB code available over the internet. I'm ... 2 votes 0 answers 241 views ### Potential pitfalls in the use of correlation Background: The red line is an index, which goes from 0 to 100, measuring uncertainty in the markets. The dark blue line is a price index, which has a lower bound at 0, and virtually no upper bound. ... 2 votes 0 answers 703 views ### Time-varying correlation via state-space representation and Kalman filter Let a linear time-varying mode like this one: y_{t}=\alpha_{t}+\beta_{t}x_{t}+\epsilon_{t}. You can also suppress the constant term to simplify this example: y_{t}=\beta_{t}x_{t}+\epsilon_{t}. ... 2 votes 0 answers 97 views ### how to identify similar assets based only on a few price samples Using quantitative finances techniques on limited information, how might one go about finding similar(highly correlated) assets whose public information is available? The only data offered on a list ... 1 vote 0 answers 43 views ### 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 1 vote 0 answers 76 views ### 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, ... 1 vote 0 answers 49 views ### 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 0 answers 71 views ### 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 ... 1 vote 0 answers 33 views ### Estimation of copula for discrete random variable I'm interested in the estimation of parameter of copula for discrete random variables. The problem is described as follow: I have 30 discrete random variables X_1,.., X_{30}, each random variable is ... 1 vote 0 answers 73 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 ... 1 vote 0 answers 41 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 ... 1 vote 0 answers 64 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 ... 1 vote 0 answers 114 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 ... 1 vote 1 answer 233 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 ... 1 vote 0 answers 41 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 ... 1 vote 0 answers 72 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 ... 1 vote 0 answers 41 views ### Hedging or Relative Value Strategies with Rho or Tau Correlations? I understand that the Pearson correlation indicates the strength of linear relationship between two data sets. The applicability of this to hedging strategies is intuitive: If I can establish a linear ... 1 vote 0 answers 167 views ### Cumulative returns are more correlated than non-cumulative I was just comparing two daily returns series and noted that the correlation between them is a lot higher if they are cumulated (about .95 for cumulative returns, vs .15 for non-cumulative). I feel ... 1 vote 0 answers 141 views ### Conditional and unconditional variance, autocovariance and autocorrelation of an ARMA process Given an ARMA(1,1) process x_t = a + bx_{t-1} + \varepsilon_t + \theta\varepsilon_{t-1}, how can we find the conditional variance, i.e. Var_{t-1}(x_t), find the unconditional variance, i.e. Var(... 1 vote 0 answers 98 views ### Simulate correlated Brownian motions conditioned on future state(s) Consider a model defined by 2 geometric Brownian motions$$dY_{1}(t) = \sigma_{2} Y_{1}(t)dW_{1}(t)dY_{2}(t) = \sigma_{2} Y_{2}(t)dW_{2}(t)$$with$Y_{1}(0) = y_{1}$,$Y_{2}=y_{2}$and$dW_{1}(... 1 vote