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Questions tagged [correlation]

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

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7
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257 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?
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388 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 ...
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421 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 ...
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1answer
99 views

Questions about beta, correlation, and covariance

Currently, I calculate beta, correlation, and covariance measures using daily log normal returns of Security A and Benchmark A. What would it mean if I were to use daily log normal excess returns in ...
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134 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 ...
4
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218 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 ...
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1answer
201 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 ...
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96 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 ...
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190 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 ...
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338 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 ...
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48 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 + \...
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30 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 ...
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80 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?
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55 views

target correlation for portfolio

Given a long / short equity portfolio, I want to have some net long exposure. My portfolio volatility is fixed to a target, so in trying to have a certain beta to the market, the only thing I can ...
2
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1answer
187 views

How to compute a single Value-at-Risk (a single quantile) of portfolio returns taking into account correlation between individual returns?

Introduction My goal is to retrieve a single Value-at-Risk (VaR) of a N(0, H) random variable $X$ at the $\alpha \in (0,1)$ confidence level where H is a known d-dimensional positive definite matrix ...
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2answers
121 views

Spot variance drift consequently to style drift

I am looking for some information on how to spot variance drift for a portfolio in accordance to its benchmarks, Let's say that we have returns of the portfolio $\textbf{P}=(P_1,...,P_t,...,P_n)$ and ...
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99 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 ...
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224 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 ...
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81 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
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215 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, ...
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97 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 ...
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266 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 ...
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216 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. ...
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647 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: $y_{t}=\beta_{t}x_{t}+\epsilon_{t}$. ...
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96 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 ...
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31 views

Relationship between correlations of long only and short only portfolio with long-short portfolio?

I am working on one quality and value factor, the correlation between a long-only or short only portfolio of these two factors is respectively 0.7 and 0.8, and the correlation between combined long-...
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47 views

Variance swap correlation trade

I found two highly correlated assets that have spread in 3M realized and implied vol at historical minimum. To go long on this spread I thought of using two variance swaps. Would it be cheaper to ...
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30 views

negative correlation between EBIT and sales in Altman's Z

In his 1968 paper, Altman found that sales volume (i.e., sales divided by total assets) is a useful predictor not by itself, but as a suppressor variable to improve the predictive power of EBIT/TA. ...
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63 views

Correlation between Two Factor Gaussian Shortrate Model and Black Scholes Model

I want to implement a two factor Gaussian Shortrate Model \begin{align} r(t) & = x(t) + y(t) + \phi(t), \\ dx(t) & = -ax(t)dt + \sigma dB_1 (t), \\ dy(t) & = -by(t)dt + \eta dB_2(t), \end{...
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36 views

Can you derive fx correlations given the historic correlations of base pairs

Say for USDJPY and GBPUSD, I have the historic data and calc the volatility and correlation between these pairs. Because GBPJPY = GBPUSD x USDJPY. Can I calculate the correlation for GBPJPY directly ...
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45 views

Analyse correlation between LIBOR (quote in yield) and MSCI AC World (in dollars)

How would you analyse the correlation between LIBOR and MXWD? My initial intention was to get the log return of MXWD and take the opposite of the log return of the LIBOR yield (because when yield ...
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0answers
107 views

Some basic examples for Granger causality

I have two time series, X and Y. The number of observations in each time series is the same and the variables would be price(logged). The goal of my research is to analyze if one variable X follows ...
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37 views

CFD broler spread as indicator for stock market

Retail trader on stock market has very limited ability to accomodate huge amount of information, it leds me to idea of using behavioir of more informed players - CFD brokers - spread of their CFD ...
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175 views

Minimizing Correlation to Index

In his PhD thesis in the chapter Market Neutral Portfolios, page 69, [1] Valle sets up an optimization problem which minimizes the absolute correlation of the portfolio log returns to the log returns ...
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56 views

Correlation between a sector and MSCI ACWI returns

I have daily return data of 11 sectors of MSCI World Index and the MSCI ACWI index. I want to know the stationarity of correlations between the sectors and MSCI ACWI index. This is what I have done: ...
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516 views

Absolute or relative strikes?

World, When pricing a CMS Spread Option the market practice consider the strike as relative to ATM or Absolute? If I relate to the following paper page 70 the author refers to absolute strike [1] ...
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59 views

P2P lending and correlation with other major asset classes

I am looking for a credible study (i.e. a good/reputable source) into the correlation of returns on assets in Market Place Lending / Online Direct Lending / Alternative Finance with other major asset ...
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61 views

Account for empirical relationship between signal and market data

I have two monthly time series : one is a 'signal', on which I will base my decision to buy or short-sell, and the second one is the time serie of a given asset's price. I have implemented this ...
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0answers
208 views

Why is credit exposure higher for a smaller probability of default than for a larger default?

I'm having trouble grasping this concept; I don't see the relevance of the explanation given in the text (Gregory, Counterparty Credit Risk and CVA) either. When expected exposure and probability of ...
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47 views

Good broad review of network modeling for quant finance?

Trying to find some good review of agent-based models for quantitative finance, covering opinion dynamics, correlated behavior, etc. Are there any articles or books that cover major advances in these ...
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69 views

Should I use a correlation coefficient formula or a multiple regression formula?

I have an assignment dealing with the stock market and I'm a little lost. My instructions are to come up a method to create a score for a stock then compare the score against what the stock actually ...
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0answers
105 views

Pricing inflation lags

I've been looking into a short piece of maths I found on pricing inflation with payment delays, and was hoping someone could confirm whether my understanding was correct or if the maths isn't quite ...
1
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0answers
1k views

Correlation Sensitivity

Suppose I have 2 stocks $S_{1}$ and $S_{2}$: \begin{align} & dS_{1}=rS_{1}dt+\sigma_{1}S_{1}dB_{1}\\ & dS_{2}=rS_{2}dt+\sigma_{2}S_{2}dB_{2}\\ & dB_{1}dB_{2}=\rho dt \end{align} Then I ...
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44 views

Cega - Correlation Delta from multi-asset derivative

I want to calculate the Cega, i.e. correlation delta, for a multi-asset derivative numerically (the difference of the price from a tiny move in correlation). However, I found it is difficult to follow ...
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29 views

How does the implied correlation change when the spot price of the Basket Call/ Put option goes up?

Given a basket Call/Put: $BasketCall_{payoff} = max[0, \Sigma^n_{i=1} w_iS_i(T) - K]$ If the spot price of the basket goes up/down, how would the implied correlation change? I guess what I am not ...
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43 views

Equal weight correlation swap payoff derivation

I am aware that the payoff for a equal weighted correlation swap is; $$ (\rho_K-\rho)*\text{Notional} $$ where $$ \rho = \frac{2} {n(n-1)}\sum_{i < j} \rho_{ij} $$ I am wondering how I can derive ...
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1answer
68 views

Average portfolio correlation vs. external metric

I am coming across a problem I can't seem to wrap my head around, and I am not sure I am using the right words so cannot find much info in it! I have a portfolio of assets, with data on historical ...
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15 views

Binomial correlation measure in the trivariate case

I have a question about the binomial correlation measure at page 530 in Hull(2009), Options futures and other derivatives (7th Edition) which is defined for the bivariate case as: $\beta_{AB}(T)=\...
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2k views

Correlated assets in Monte Carlo simulation

I'm trying to simulate $N$ correlated assets in Excel in order to estimate a basket option price. For 2 assets, I correlated the two random variables $X_1$ and $X_2$ and then simulate the ...
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35 views

Spot an activity of stock tickers

I've got 5 minute interval data of the 500 most viewed tickers. I would like to try to correlate changes in place in ranking of given ticker with volatility of underlying asset (for given stock market)...