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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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1answer
76 views

Sharpe Ratio with Stochastic Interest Rate?

All versions of the Sharpe ratio that I've seen seem to assume that the risk-free rate is constant, and the standard deviation of the excess return in the denominator simplifies to the standard ...
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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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1answer
87 views

Correlation among different sectors of the market

It is known that many sectors/industries within the stock market are correlated with each other. For example, using VIF as a measure of correlation, I have the following result: ...
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1answer
38 views

calibrating two (or X) equity diffusion trees

I have two equities S1 and S2. Each one follows the following tree evolution : $$S_1 \rightarrow \left \{ \begin{matrix} S_1 (1+u_1) & \text{with probability } p_1 \\ S_1 (1-d_1)...
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1answer
111 views

Preference between low (zero) and negative correlation

I am trying to create an artificial score grading user's portfolio correlation. In terms of diversification, lower correlation is obviously better. However, should negative correlation get a higher ...
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0answers
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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3answers
28k views

Correlation between prices or returns?

If you are interested in determining whether there is a correlation between the Federal Reserve Balance Sheet and PPI, would you calculate the correlation between values (prices) or period-to-period ...
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1answer
247 views

Portfolio correlation of a long-short portfolio

I have a portfolio of long/short positions in stocks. I would like to calculate the portfolio correlation. Should I somehow account for the short position while calculating the portfolio correlation? ...
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1answer
102 views

correlation in time series analysis

the goal of my research is to analyze if one variable X follows the movement of another variable Y over time. Meaning that Y is slightly ahead of X. The number of observations in each time series is ...
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4answers
1k views

cointegration applied to Portfolio Construction & Risk management

There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc. But there ...
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1answer
142 views

Correlation basket equities

One question: when asking for the correlation of a basket, a trader told me 50% whereas I expected him to give me asset pairwise correlations (i.e. the correlation matrix). What does this 50% mean ...
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1answer
401 views

Correlation of assets to portfolio of assets

How do you calculate the correlation of an asset to a portfolio, when for all assets in the portfolio you know there: correlation to each other, volatility and weight in portfolio. For example: ...
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4answers
6k views

Calculate correlation between two sub portfolios and the combined portfolio

I have two sub portfolios (lets call them portfolio a & portfolio b - a portfolio is just a vector of weights that sum to 1) that combine to create a total portfolio. I also have a 2 x 2 ...
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825 views

What is the most stable, non-trivial dependence structure in finance?

The highest rated answer to the question on What concepts are the most dangerous ones in quantitative finance work? is this one: Correlation Correlations are notoriously unstable in ...
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1answer
56 views

What are the reasons that make stock return - bond yield correlation a meaningful one?

I have come across interesting charts that show the changing correlation between stock returns and government bond yields. My gut instinct tells me that such relationship would be expected to be ...
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1answer
555 views

Monte-Carlo simulation Hull-White process

I have one question about Monte-Carlo simulation Hull-White process, maybe you can give me some advice. I constructed a Hull-White process using Python and QuantLib. Now I want to construct a Hull-...
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0answers
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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3answers
208 views

generating a correlated RV which has the same correlation to existing samples

Suppose I have generated a collection of correlated sequences of samples $(S_i)_{i=1}^{n}$ from random variables $\mathbf{\underline{x}} = x_i$. Let's fix a sequence of reals $(\sigma_i)_{i=0}^{n}$. ...
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1answer
257 views

Dollar Index vs Hang Seng Index: Negative correlation, but what's driving it?

I recently read an article which highlighted that a weaker dollar tends to coincide with rallies in Hong Kong stocks. I did some quick analysis: I calculated monthly returns on the Dollar Index and ...
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1answer
469 views

Quanto effect in cross currency mtm swaps

Apparently the standard way to value these swaps involves ignoring the quanto effect, - ie the correlation between fx and rates. I wonder why this is - is this correl always so close to zero? Eg of ...
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1answer
290 views

Correlation between equity returns and debt spread changes

I have got two rather short questions. Statement: Theoretically, a firm's equity prices and credit spreads should be negatively correlated. This correlation tends to be stronger for riskier companies....
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1answer
122 views

Correlation between bond yields and stock returns?

I intend to regress the correlation coefficient (rolling window and/or DCC) between NIKKEI 225 adjusted close and 10yr Japanese government bonds on inflation , inflation expectations and other factor ...
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2answers
457 views

Difference between Local Vol and Copula

Let's assume we have ATM European call on a basket of two stocks and price it with: 1) Multivariate Local Vol with constant correlation 2) Gaussian copula Assuming we use the same correlation ...
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2answers
454 views

Falling Futures prices positively correlated with interest rates

I'm having trouble understanding how Futures are worth more than Forwards when price and interest rates are positively correlated but both declining. For instance, a Future with losses of -5 at T(n-...
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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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1answer
163 views

How to calculate the contribution (%) of an asset to the global correlation of the portfolio?

I have a portfolio X with weights $w_i$. I am trying to find the contribution $\xi_i$ of asset $i$ to the total correlation $\rho_{XM}$ of the portfolio X to an index M. I can't find these ...
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2answers
126 views

Ordered correlated random numbers

I'm not sure how feasible this is. I'm aware of how to generate correlated random numbers using a cholesky decomposition. However, say I have a fixed data set in increasing order (e.g. Price series: $...
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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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1answer
52 views

Calculate price variance caused by denominating currency

I would like to calculate asset correlations while excluding movements resulting from the denominating currency (as much as possible). My common sense tells me that any two assets with the same ...
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1answer
232 views

Pearson correlation coefficient based on OHLC data

Pearson correlation coefficient based on OHLC data I've found only this article "Estimating correlation from high, low, opening and closing prices" by L. C. G. Rogers and Fanyin Zhou (2007) http://...
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1answer
2k views

Counterintuitive time varying Beta with Kalman filter

If you're used to play with R, you'll enjoy the following reproducible code: ...
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0answers
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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1answer
76 views

Implementation of total correlation of assets in R

I am trying to implement the (average) total correlation of assets, which is discussed here and here in R. Specifically, I am looking at $\rho_{av(1)}$ and $\rho_{av(2)}$: $$ \rho_{av(1)} = \frac{2 \...
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4answers
17k views

What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
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1answer
317 views

Correlation of asset X with a portfolio of asset Y and Z [closed]

I have three assets and a covariance matrix. How do I calculate the correlation of asset X with a portfolio that includes assets Y and Z? For example, assume I want to calculate the correlation of ...
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1answer
889 views

Gaussian vs Student Copula applied to finance

I would like to get your opinion on the following topic: I am comparing the behaviour of Gaussian and Student-t Copulas. I employ the follwing procedure: Simulate N=100,000 samples from a Student ...
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1answer
316 views

Control for non-synchronous trading in correlations

I am trying to replicate some results from the Betting Against Beta paper by Frazzini & Pedersen. In section 3.1, Estimating Ex Ante Betas, they illustrate their approach to correlations: [we ...
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1answer
86 views

Two time series similarity with slightly offset timestamps [closed]

Let's say I have two time-series S1 and S2 where S1 looks like this: ...
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2answers
2k views

What is the total correlation between assets in a portfolio?

Suppose I have portfolio with 10 assets, each one of them with a weight of 10% from the total portfolio (equally weighted). It's well known how to measure from historical prices->returns a variance-...
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1answer
402 views

z-score versus log standardisation of stock prices for calculating correlation; which to use (in ML clustering, distance measure)?

I need to compare (get correlation between) different financial instruments (stocks). The problem is that different stocks will have different price scales. I was thinking of using z-score ...
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0answers
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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1answer
835 views

How variance dispersion trades become short volatility

From this document, http://quantlabs.net/academy/download/free_quant_instituitional_books_/[JP%20Morgan]%20Variance%20Swaps.pdf, on page 56, it states that Losses from short correlation through ...
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4answers
790 views

portfolio diversification tester

Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined ...
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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)...
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1answer
319 views

Pricing and Hedging an Option through a Currency Triangle

How is the option price of an plain vanilla option (in a Black Scholes setting) derived, which is written on, say XAGGBP but practically hedged with XAGUSD and GBPUSD (because these are more liquid)? ...
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1answer
85 views

Transform raw forecasts into orthogonal forecasts

I am trying to combine multiple forecasts on each of N assets in line with Grinold and Kahn's methodology, taken from Active Portfolio Management, 2nd ed. On p.311, they suggest transforming the raw ...
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4answers
250 views

Correlation of Asynchronous Brownian Motion

I am trying to use the closing prices of the S&P 500 and the Nikkei Index to see how they are correlated (assuming they are exactly 12 hours apart). In order to test my method, I have generated ...
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0answers
58 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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1answer
113 views

Return correlations

Assume an equity fund sample shows returns negatively correlated with the S&P 500. Are we more inclined to say that a) these funds are invested outside the S&P 500, perhaps non-US stocks; b)...
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54 views

Time series pair X, Y, with first half correlation 0.3 and rest half 0.4, what is the general correlation? [closed]

As is stated by the title Time series pair X, Y, with first half correlation 0.3 and rest half 0.4, what is the general correlation?